Interest & dividend taxation

[scotia]

greygymsock - many thanks for your response on the English system. and I can understand why you said

i haven't got my head round how this would work in scotland

There seems little chance that Derek Mackay (Cabinet Secretary for Finance and the Constitution - Scottish Parliament) had any idea of the complications his budget proposals would introduce. Indeed, I suspect there is little chance of anyone being able to compute an optimised strategy for the Scottish system, given the interaction between the Scottish extra tax bands and tax rates for earned income, and apparently the UK tax rates for Interest and dividends (which I had not been aware of). If the latter was apparently agreed on the basis that Interest and Dividends arise UK-wide, it could possibly be argued that these rates should also not affect or be affected by the positioning of the different Scottish and UK bands. Who knows?

[daveh]

greygymsock - many thanks for your response on the English system. and I can understand why you said

i haven't got my head round how this would work in scotland

There seems little chance that Derek Mackay (Cabinet Secretary for Finance and the Constitution - Scottish Parliament) had any idea of the complications his budget proposals would introduce. Indeed, I suspect there is little chance of anyone being able to compute an optimised strategy for the Scottish system, given the interaction between the Scottish extra tax bands and tax rates for earned income, and apparently the UK tax rates for Interest and dividends (which I had not been aware of). If the latter was apparently agreed on the basis that Interest and Dividends arise UK-wide, it could possibly be argued that these rates should also not affect or be affected by the positioning of the different Scottish and UK bands. Who knows?

Unfortunately some of us will have to get our head round it. I have avoided having to do a tax return (or having to pay extra tax) by keeping under the higher rate band by paying more into my work pension, such that my dividend, interest and earned income remain within the standard band. If earned income is considered first, I should be able to arrange my income such that no further tax is due, and shouldn't need to do a tax return.

[scotia]

I am resident in Scotland, and am mainly retired, but with a very variable part-time consultancy income. To avoid HMRC underestimating and overestimating income - with consequent underpayments and overpayments, I try to keep my tax relatively constant, using VCT purchases and Charitable Gifts (to CAF) to iron out the swings. I have a relatively simple spreadsheet to advise me on this strategy, and usually it agrees with the HMRC calculation within rounding errors. But next year? I have no problems in coding even complex scenarios, but the problem is in achieving a sufficient understanding of the Scottish scenario in order to carry out the coding. I confess that I missed the added complexity of Interest and Dividend Rates remaining as per the UK - so many thanks for that clarification.
Again - apologies for being no help in the current context - but I hope I am at least making Scottish contributors aware of the considerable complexities that have been added to the Scottish system, and the difficulties we will experience in our computations. See http://www.gov.scot/Resource/0052/00529309.pdf for a "justification" of the changes. In it they (Scottish Government) claim that they "conducted a series of roundtable discussions with business and third sector organisations, think tanks and tax professionals." It would be interesting to know if they paid any attention to the views they received. Maybe the tax professionals were rubbing their hands in delight - lots of lucrative new business.

[greygymsock]

I do have reasons for using UFPLS, but they may be wrong...
* I have Fixed Protection
* I am only 10% away from the protection limit
* I do not really want to increase the amount of taxable savings/investments if I can avoid it
* I wanted to fully utilise my basic rate band to start withdrawing some money from my pensions
* I am fully using his & hers ISAs etc
* I am maximising my wife's pension contributions up to the limit of her salary

that all sounds sensible while you're under your fixed protection limit. my first thought would be that, if/when your pension grows big enough that it would exactly use the FP limit, you might want to crystallize the whole thing at that point.

Do you know if HMRC is capable of coping with your final point around order of taxation. I ask the question for 2 reasons...
* When I did a bit of 'what if' with HMRC self-assessment last year, I think some of their calculations were wrong
* For last tax year, HMRC treated me as PAYE and sent me £200 refund cheque. I completed Self Assessment and paid them £400 it said I owed. I pretty sure that my self assessment is right and they are wrong! I am still trying to get them to sort it out.

i'm not quite sure. there are some known errors in HMRC's automated tax calculations for 2016/17, which they are supposed to be fixing. but i don't recall this situation as being one of the known error cases, so perhaps they'd get it right.

As an aside, I think it is wrong that a supposedly 'self assessment' tax regime is this complicated. An average person should be able to sort it out without needing to use a specialist.

yes. it's mostly the interaction of various new allowances/bands that hasn't been thought through here. that combined with taxing different kinds of income at different rates. there's no good reason for it to be this complicated.

[JohnB]

I have avoided having to do a tax return (or having to pay extra tax) by keeping under the higher rate band by paying more into my work pension, such that my dividend, interest and earned income remain within the standard band. If earned income is considered first, I should be able to arrange my income such that no further tax is due, and shouldn't need to do a tax return.

The problem is that with dividends taxed and interest not taxed at source, even basic rate/no taxpayers need to do tax returns if they have more than £2k in dividends, £1k in interest. I had to start doing mine and my elderly mother's this year after a a 5 year gap when HMRC PAYE covered it all.

Osborne did like complicating the tax code, with all these bands and clawbacks. Its now nearly the case that only a program can get the right answer, not someone with a pen and paper.

[daveh]

I have avoided having to do a tax return (or having to pay extra tax) by keeping under the higher rate band by paying more into my work pension, such that my dividend, interest and earned income remain within the standard band. If earned income is considered first, I should be able to arrange my income such that no further tax is due, and shouldn't need to do a tax return.

The problem is that with dividends taxed and interest not taxed at source, even basic rate/no taxpayers need to do tax returns if they have more than £2k in dividends, £1k in interest. I had to start doing mine and my elderly mother's this year after a a 5 year gap when HMRC PAYE covered it all.

Osborne did like complicating the tax code, with all these bands and clawbacks. Its now nearly the case that only a program can get the right answer, not someone with a pen and paper.

I'm hoping I'll have my taxable dividend income below £2000 for the next tax year, by a concerted bed and ISA effort. This year the taxable dividend income is going to be around £4200-£4500, but a fair number of the shares that produced that income have been ISA'd already and I'll try and get another £20k of shares into ISAs this year. I'm hoping that will get the taxable dividend income below £2k, it will be tight, but I'll also have dividend income that is appearing in the ISAs that can be used to get more taxed shares sheltered.

[XFool]

WARNING: Smug old git post coming up...

The problem is that with dividends taxed and interest not taxed at source, even basic rate/no taxpayers need to do tax returns if they have more than £2k in dividends, £1k in interest. I had to start doing mine and my elderly mother's this year after a a 5 year gap when HMRC PAYE covered it all

Yeah. I still remember the George Osborne budget in 2015 when he changed all the rules. That afternoon I predicted this very point on the old TMF.

There was quite a queue of people eager to point out how I was "wrong" and basically didn't understand what I was talking about.

Remember, this was described at the time as "simpler and clearer".

[Nocton]

Yes, you are right XFool, the consequences this change were not properly thought through.
This change had a devastating effect on my wife's and my after-tax income as most of our retirement income is as dividends rather than as pensions. We have always filled in a tax return and with substantial gifts and gift aid there has usually not been much more tax to pay. But this year instead of the tax credit we are hit with a substantial tax bill and our gifts have got less tax to set against them, so we had to pay tax on our gifts! As there is more tax to pay, we then also have to pay a down payment for next year's presumed tax! Now we see how it all works we shall reorganise our affairs for 2018, but the net result will be a significant reduction in the amount we give to charities.

[Bouleversee]

I have always managed to do my own tax returns in the past but I don't know whether I am losing my marbles or whether the govt. has made things too complex for even reasonably intelligent people to understand but I am finding it difficult to get my head round the way dividends and interest are now taxed.

I have just managed to submit last year's return online and haven't had to pay any higher rate tax but for the current year, where I will receive a whole year's income from my late husband's state pension and residual fixed rate annuities (amounting to about £38,300 gross (a), possibly slightly less as I think one guarantee falls off), it looks as though I may have to do so. Last year I had about £4270 interest (b) (likely to be less this year and much less next year) ) and about £9,200 dividends (c). No idea at the moment what these will amount to this year. I really should have bed and ISAd some of those holdings or gifted more of them but for various reasons haven't got round to it, though some have been disposed of.

How do I work out what rate of tax I will be paying on (a), (b) and (c) this year and next year? Am I right in thinking that if my total gross income is over £45k, before applying the personal allowance of £11,500 for the current year, I will be a higher rate taxpayer and will have to pay 40% tax on interest over £500 and 32.5% tax on dividends over £5000 (over £2000 next year)?. Is it yet known what next year's personal allowance and savings allowances will be?

I obviously need to do some serious financial planning to reduce IHT payable and try to avoid losing the RNRB which I gather gets tapered out on estates over £2m but that's another story. First I need to be clear as to how the system works till it gets changed yet again..

[Alaric]

Is it yet known what next year's personal allowance and savings allowances will be?

I found a Budget "summary" prepared by one the big accountancy firms.

http://www.ukbudget.com/files/deloitte- ... 018-19.pdf

It's mostly "no change" apart from the known cut in the dividend allowance from £ 5,000 to £ 2,000. The personal allowance increases to £ 11,850 from £ 11,500 and the higher rate trigger to £ 46,350 ( £ 34,500 of taxable income) .

That's all on the first 4 pages.

[Bouleversee]

Thanks, Alaric. I couldn't read the notes on my laptop but it looks from the tables as though I was correct in my penultimate para then.

What is a trading allowance?

[PinkDalek]

What is a trading allowance?

In case you missed it, here’s a reply I prepared earlier:

viewtopic.php?f=62&t=8553&p=99031&p99031#p99031

[Bouleversee]

Thanks, PD. I obviously am losing my marbles, my memory certainly. I try to tell myself it's due to information overload but I fear it's more than that.

[ursaminortaur]

I do have reasons for using UFPLS, but they may be wrong...
* I have Fixed Protection
* I am only 10% away from the protection limit
* I do not really want to increase the amount of taxable savings/investments if I can avoid it
* I wanted to fully utilise my basic rate band to start withdrawing some money from my pensions
* I am fully using his & hers ISAs etc
* I am maximising my wife's pension contributions up to the limit of her salary

that all sounds sensible while you're under your fixed protection limit. my first thought would be that, if/when your pension grows big enough that it would exactly use the FP limit, you might want to crystallize the whole thing at that point.

You need to be careful because each time you take money out using UFPLS you use up more of your protected LTA.
If you are anywhere close to the protected LTA it would be far better to crystallise the pension - after that you would not have any more LTA tests until you reached 75. At that point a further test will be done but that will be on any growth since crystallisation which is left in the pension pot. This means that you can guarantee not exceeding the LTA by taking out the growth before you reach 75 which unlike with UFPLS withdrawals will not be counted against your LTA.

[Blagdon]

Thanks ursaminortaur.

So can I just check ... if I crystallise the whole lot now ...
* I use up 90% of my LTA
* I then pay dividend tax & CGT on the 25% tax free cash lump sum forever more
* Can I use my remaining 10% LTA at age 75 if I have not withdrawn all the growth?

Alternatively I keep doing UFPLS each year (to use up all basic rate band) until the reducing LTA and the hopefully increasing remaining pot meet and then I crystallise the remaining pot ...
* I use up all my LTA sooner
* I pay less dividend & CGT for the next few years
* I need to withdraw all growth from when I crystallise

Blagdon