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Tax year end - pension conts

Practical Issues
greygymsock
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Re: Tax year end - pension conts

#130229

Postby greygymsock » April 5th, 2018, 5:43 pm

pochisoldi wrote:If you assign £1000 of personal allowance to dividends you save £1000 *7.5% tax = £75
If you assign £1000 of personal allowance to salary you save £1000 * 20% tax = £200 - you gain £125

(For a higher rate tax payer the rates are 40%/32.5% and you gain £75)

No brainer - if you have a choice use your personal allowance against salary not dividends.


in most situations, that's correct, but not in melonfool's situation, nor in the similar situation in "2.6 Example 6".

in these (edge) cases:
if you assign £1000 of personal allowance to salary, you save £1000 * 20% tax = £200.
if you assign £1000 of personal allowance to dividends, you save £1000 * 32.5% tax = £325.
so it's better to assign it to dividends.

these edge cases didn't exist before the 2016/17 tax year (when the dividend allowance was introduced). before that, i think you did always get the correct result by always assigning personal allowance against salary in the first place.

pochisoldi
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Re: Tax year end - pension conts

#130252

Postby pochisoldi » April 5th, 2018, 7:25 pm

greygymsock wrote:
pochisoldi wrote:If you assign £1000 of personal allowance to dividends you save £1000 *7.5% tax = £75
If you assign £1000 of personal allowance to salary you save £1000 * 20% tax = £200 - you gain £125

(For a higher rate tax payer the rates are 40%/32.5% and you gain £75)

No brainer - if you have a choice use your personal allowance against salary not dividends.


in most situations, that's correct, but not in melonfool's situation, nor in the similar situation in "2.6 Example 6".

in these (edge) cases:
if you assign £1000 of personal allowance to salary, you save £1000 * 20% tax = £200.
if you assign £1000 of personal allowance to dividends, you save £1000 * 32.5% tax = £325.


We are talking about £1000 of marginal income taxed at the appropriate higher rate of tax.
Fiddling with the application of the personal allowance won't turn £1000 of higher rate income into £1000 of basic rate income.

Therefore
if you assign £1000 of personal allowance to salary, you save £1000 *40% tax on salary, but pay £1000 *32.5% tax on dividends.
Tax due: £325

if you assign £1000 of personal allowance to dividends, you save £1000 * 32.5% tax on dividends = £325, but pay £1000 * 40% tax on income.
Tax due: £400

Again - no brainer...

PochiSoldi

greygymsock
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Re: Tax year end - pension conts

#130265

Postby greygymsock » April 5th, 2018, 8:16 pm

pochisoldi: in the special case, when the "dividend allowance" is straddling the basic/higher-rate boundary, it comes down to a choice of basic-rate tax on salary or higher-rate tax on dividends. this is because the dividend allowance applies a 0% rate to the lowest £5,000 of dividend income, other than any dividends which the personal allowance has been set against.

have you read the HMRC example linked to, in which they say it is more favourable to set part of the personal allowance against dividends, instead of setting all of it against salary?

try calculating the income tax due if you follow their advice; and calculate it again if you set all the PA against salary. it's less tax if you follow their method.

then try the same calculation with melonfool's income, either assigning the personal allowance as i suggested in viewtopic.php?f=49&t=10945#p130179 or assigning it all to salary. it's less tax by following my suggestion.

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Re: Tax year end - pension conts

#130296

Postby pochisoldi » April 6th, 2018, 1:36 am

greygymsock wrote:pochisoldi: in the special case, when the "dividend allowance" is straddling the basic/higher-rate boundary, it comes down to a choice of basic-rate tax on salary or higher-rate tax on dividends. this is because the dividend allowance applies a 0% rate to the lowest £5,000 of dividend income, other than any dividends which the personal allowance has been set against.

have you read the HMRC example linked to, in which they say it is more favourable to set part of the personal allowance against dividends, instead of setting all of it against salary?

try calculating the income tax due if you follow their advice; and calculate it again if you set all the PA against salary. it's less tax if you follow their method.

then try the same calculation with melonfool's income, either assigning the personal allowance as i suggested in viewtopic.php?f=49&t=10945#p130179 or assigning it all to salary. it's less tax by following my suggestion.


I read and reread the example, and I couldn't initially get my head around it as it doesn't explain what's happening when you chose the alternate allocation, then I got it. The idea is to avoid having the dividend allowance being wasted covering income otherwise taxed at 7.5%, when it could be covering dividends being taxed at 32.5%

The commonest edge case seems to be when
D + N > P + B
AND
N < P + B

and the fix is to assign the lower of
P + B - N
OR
D - A
of the personal allowance to dividends

where
D = Dividend income
N = Non-dividend income
P = Personal allowance
B = Basic tax rate band (as extended by gift aid, pension etc)
A = Dividend allowance

The other edge case could be where the dividends take you into the additional tax band - I'll never have that problem...

PochiSoldi

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Re: Tax year end - pension conts

#130614

Postby scotia » April 7th, 2018, 8:07 pm

Most of you are probably fed up with my complaints concerning the new Scottish tax system. But if you think computations around the higher tax boundary concerning Interest and Dividends are complicated, have a thought for the Scottish system where we have two higher tax boundaries, namely one for income - lower than the English boundary, and the other for Interest and Dividends, as per the UK (English) boundary. And of course, to add to the fun, for taxable year 2018/2019 we have five income tax rates (plus the UK Interest and Dividend rates). Fortunately I have no pension contributions to add to the confusion, but I do have charitable donations which will affect a higher rate boundary (which one and how?).
I keep hoping if I complain often enough on these boards, some kind gentleman (or gentlewoman) will announce that he/she has created an all-knowing spreadsheet that will infallibly carry out the appropriate computation - and is willing to pass it on to all us troubled Scottish souls.

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Re: Tax year end - pension conts

#130627

Postby melonfool » April 7th, 2018, 9:57 pm

Presumably the online self assessment form is the all-knowing spreadsheet, just in a different format?

Mel

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Re: Tax year end - pension conts

#130645

Postby scotia » April 8th, 2018, 1:16 am

Presumably the online self assessment form is the all-knowing spreadsheet, just in a different format?

I usually carry out my own calculations before the end of the taxable year, and use it to adjust my affairs - e.g. charitable donations to CAF and purchases of VCTs. So the HMRC online form for the previous tax year is of limited use. As soon as I have accurate returns on savings interest, I'll be making a return for 2017/2018, and hopefully some of the guesses I have made on the interactions between the Scottish and UK tax bands may be clarified by the HMRC computation. However for 2018/2019 the situation gets even more complex with different (and additional) tax rates as well as different tax bands.


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