Accounting for Income

[XFool]

Sigh!

I am posting this here as I don't know where else to put it on LMF. It might be moved as it is not a Tax question as such but it is intrinsically linked to the system of income taxation. Also, people here who are used to unpredictable incomes must have encountered the problem before. In addition, this board comes under 'MANAGING YOUR FINANCES'.

I have for years kept a regularly updated spreadsheet of my current share portfolio and overall financial situation, including showing expected annual income at that point. This was primarily for my own use and not itself for any tax reporting reasons.

A couple of years ago:

I was a basic rate taxpayer. My PAYE income was pensions only so was known and fixed at the start of the tax year. A Post It Note and one minutes work was all I needed to write out the gross income, tax to pay, nett income for the year and transfer nett PAYE income to the spreadsheet. Expected dividends (no tax to pay), expected interest (nett of tax) was totalled up along with tax free income from ISAs etc. This was all simply added up to give a total expected yearly post tax income for the year. Simple.

No longer. Since the changes to the income tax system I have struggled to convert my simple spreadsheet, ideally to give the same result of overall real income. I eventually settled on a sort of bodged hybrid, by totalling up gross received dividend and interest, adjusting the gross totals by applicable tax rates and then adding in two adjustment figures to compensate for the relevant allowance bands. But I no longer know what the nett PAYE income is and can't do until possibly over a year from the current(!) spreadsheet. I left this dangling with last year's figures in place but have recently been trying again to sort it all out.

Obviously the reality is I cannot continue to work with post tax figures (the real income), as I cannot know what they are. So the only common figures would seem to be the gross, pre-tax figures. But how then do I add in intrinsically tax free figures? Artificially gross them up? This is just silly. It begins to look as though I need to have two income totals, a tax free one and a separate gross taxable one.

But, my 'main' share portfolio consists of shares not in an ISA, a share ISA and cash in an interest bearing taxable account. So...

My question is how do other people deal with this, if they do? Or should I just give up on the whole thing?

[StepOne]

I don't bother working out to the penny. I just put aside a couple of hundred pounds each month to cover the dividend tax bill I will have to pay in January. That should actually be more than needed so hopefully I will get a few extra quid to spend when the bill is spent. Although I will now also have to pay six months 'on account' in January for the year ending April 2018.

Is you income from dividends and interest pushing to in to a higher tax band - is that what's causing the complication?

StepOne

[Alaric]

Is you income from dividends and interest pushing to in to a higher tax band - is that what's causing the complication?

Keep a running total of dividends received over the year. There's only tax to pay if it exceeds £ 5,000 (£ 2,000 if the proposed changes go through). If you sell every year to utilise CGT exemptions and to roll taxed assets into ISAs, that can gives the cash flow needed to settle any tax bill.

[XFool]

I don't bother working out to the penny.

For this purpose neither do I, neither for the amounts or the totals.

Is you income from dividends and interest pushing to in to a higher tax band - is that what's causing the complication?

That possibility is now one more potential complication. But even without that it no longer seems simple. Previously all tax free and taxed (at zero or BR) income could simply be added up to a tax nett total. With fixed annual pension income it was simple to work out the post tax figure here as well.

I guess this must always have been a normal situation with people on variable incomes and on HR tax, it was just very simple for a BR tax payer under the previous income tax system. I was wondering how/if other people dealt with the same situation.

A thought occurs, at least provided I am a BR taxpayer, why can't I use the same bodge on PAYE income as I used on dividends and interest? Total the gross figures, adjust the whole amount for BR tax (20%), then add on a correction amount to allow for the personal tax allowance. Wonder why I didn't think of that before. Apart from the tax rate complication it seems to make sense here and now. Can't see the wood for the trees given all the new complications!

[StepOne]

If you are a basic rate taxpayer, then don't you simply need to take your total dividend income, subtract £5000 from it and take 7.5% of the result as your tax to pay. Subtract that from the total dividend income to get your net income for the year.

[XFool]

If you are a basic rate taxpayer, then don't you simply need to take your total dividend income, subtract £5000 from it and take 7.5% of the result as your tax to pay. Subtract that from the total dividend income to get your net income for the year.

Perhaps I haven't explained well enough. This isn't about working out my tax, that's a separate matter, it's about having a neat simple spreadsheet that tells me my current financial situation, including a reasonable estimate of my expected total annual income. It isn't dead accurate and anyway it changes as the situation changes through the year. It is purely for my own convenience and interest.

Under the old tax system, and being a BR taxpayer, meant everything was very simple. All income was taxed individually at source (or not taxed if appropriate) and totalled under categories: Taxed Interest, Tax Free Interest, Portfolio Income (two separate portfolios), so the nett figures could be predictably worked out and totalled up quite simply. Along with predictable post tax PAYE income everything could then simply be totalled up.

Leaving aside the further complication of possible HR tax bands, and their implication for the size of the allowances, it seemed to have become too complex and messy (and contingent on events) to work out an after tax income in every case as before so they could all be added together on the same basis.

My simple 'adjustment' of the interest and dividends (tax fully then add back a correction amount to account for the allowance) worked well enough, but how to handle PAYE had defeated my (as this is now where in practice ALL the separate and variable taxes actually come from). However in writing about this on here it has occurred to be that the same trick could be done with the PAYE income for my spreadsheet: just work out separately what the tax on that would be if I had no other income at all. Sees obvious now but I guess I was getting the complexities and practicalities of the taxation system itself muddled up with my

It still may not work simply because of possible HR tax complications plus I consider total portfolio income as dividends plus interest on cash. So is income from 'HERE' inside or outside the interest tax allowance as opposed to income 'THERE'? So I might get a meaningful total figure, but individual components might not be quite correct.

Perhaps I am overdoing it! After all the figures can only be forward estimates and vary over time anyway.