Personal Taxation of Dividend Income
Discussion
so one of my colleagues and long term friend received part of his income as dividends. He's trying to find out how to calculate the income tax liability on this income.
Having looked at various helpful websites he said he was still rather confused. SO, I thought I could get some help here!..Can anyone help me on this?
Having looked at various helpful websites he said he was still rather confused. SO, I thought I could get some help here!..Can anyone help me on this?
Here's how it works.
Dividend actually received (say) £40,000.00
Notional Tax Credit on Dividend (10%) - £4,444.40
Gross (Tax Inclusive) Dividend - £44,444.40
Income for tax calculations -
Dividend - £44,444.40
Gross Salary (Say) - £10,000.00 (PAYE deducted £505.00)
Total taxable income - £54,444.44
Tax Calculation (2011/12) -
First £7,475 - Nil
Next £32,475 @ 10% Savings Rate - £3,247.50
£2,525 @ 20% (the salary of £10,000 less the personal allowances of £7,475)
- £505.00
Balance of Income remaining of £11,969 @ 32.5% - £3,889.92
Total tax liability arising is £7,642.42
However, £505 has already been paid under the PAYE system
And the Tax Credit of £4,444.40 is also deducted from the overall amount due.
Therefore, the actual amount payable under the self assessment system will be £2,693.02 (£7,642.42 less the PAYE of £505.00 and less the dividend tax credit of £4,444.40)
Note that Dividend Income is deemed to be based on savings i.e. investments. It is not "earned" income, unlike salary. This is a crucial distinction in UK tax law - and massively exploited by those who can do so.
The Higher Rate of tax on dividend income is 32.5%, not 40%.
Please note that when a Self Assessment tax bill for a given year exceeds £1,000, HMRC will also expect two payments on account for the following tax year. The payments on account are based on the self assessment tax liability for the year just returned. So, if the SA tax bill as outlined above came to £2,693.02, then two payments on account of £1,346.51 will also need to be paid.
The payments on account can be reduced, to Nil if appropriate, if the taxpayer knows that the tax liability for the next year is going to be less than for the previous year.
It's all so simple
Dividend actually received (say) £40,000.00
Notional Tax Credit on Dividend (10%) - £4,444.40
Gross (Tax Inclusive) Dividend - £44,444.40
Income for tax calculations -
Dividend - £44,444.40
Gross Salary (Say) - £10,000.00 (PAYE deducted £505.00)
Total taxable income - £54,444.44
Tax Calculation (2011/12) -
First £7,475 - Nil
Next £32,475 @ 10% Savings Rate - £3,247.50
£2,525 @ 20% (the salary of £10,000 less the personal allowances of £7,475)
- £505.00
Balance of Income remaining of £11,969 @ 32.5% - £3,889.92
Total tax liability arising is £7,642.42
However, £505 has already been paid under the PAYE system
And the Tax Credit of £4,444.40 is also deducted from the overall amount due.
Therefore, the actual amount payable under the self assessment system will be £2,693.02 (£7,642.42 less the PAYE of £505.00 and less the dividend tax credit of £4,444.40)
Note that Dividend Income is deemed to be based on savings i.e. investments. It is not "earned" income, unlike salary. This is a crucial distinction in UK tax law - and massively exploited by those who can do so.
The Higher Rate of tax on dividend income is 32.5%, not 40%.
Please note that when a Self Assessment tax bill for a given year exceeds £1,000, HMRC will also expect two payments on account for the following tax year. The payments on account are based on the self assessment tax liability for the year just returned. So, if the SA tax bill as outlined above came to £2,693.02, then two payments on account of £1,346.51 will also need to be paid.
The payments on account can be reduced, to Nil if appropriate, if the taxpayer knows that the tax liability for the next year is going to be less than for the previous year.
It's all so simple
Edited by Eric Mc on Thursday 26th July 12:42
The bulk of my clients prefer to pay any taxes owed directly rather than opt for using their PAYE tax codes. They feel they know better where they stand for any given tax year as the Coding adjustments aren't always terribly clear and can be very confusing.
I have even picked up clients from accountants who used the Coding option for their clients and the clients hadn't a clue where they stood - and therefore became disillousened with their accountant.
PAYE and Self Assessment are awkward bedfellows and I don't think they interact very well at al.
I have even picked up clients from accountants who used the Coding option for their clients and the clients hadn't a clue where they stood - and therefore became disillousened with their accountant.
PAYE and Self Assessment are awkward bedfellows and I don't think they interact very well at al.
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