How much income tax do I owe in 2016/17?

Interaction of the personal allowance, the savings rate band, the personal savings allowance and the taxation of dividends continues to confound

The interaction of the personal allowance, the savings rate band, the personal savings allowance and the taxation of dividends in 2016/17 is extremely complex as was illustrated in our webinar and in a subsequent article and editorial in TAXline.

In an attempt to assist the taxpaying public HMRC published a Dividend allowance factsheet with six examples.  Example 6 is for an individual with non dividend income of £40,000 (implied it is not savings income) and dividends of £9,000. The example says the personal allowance will be set against the non dividend income leaving £29,000 taxed at 20% and £5,000 of the dividends will be taxed at 0% with the balance taxed at 32.5% 

 

Non dividend income

Dividend income

Income

40,000

9,000

Personal allowance

11,000

 

Taxable

29,000

9,000

£29,000 taxed @ 20%

5,800

 

£5,000 taxed @ 0%

 

0

£4,000 taxed @32.5%

 

1,300

 

The basic rate band of £32,000 is used by the non dividend income of £29,000 and the first £3,000 of the 0% dividend rate band. Total tax payable is £7,100.

However, the personal allowance can be allocated in the way which will result in the greatest reduction in the taxpayer’s liability to income tax (ITA2007 s25(2)) and in the above example the tax liability would be lower if the personal allowance was allocated differently.

 

Non dividend income

Dividend income

Income

40,000

9,000

Personal allowance

8,000

3,000

Taxable

32,000

6,000

£32,000 taxed @ 20%

6,400

 

£5,000 taxed @ 0%

 

0

£1,000 taxed @32.5%

 

325

 

By allocating the personal allowance between the two strands of income the tax liability is reduced to £6,725, a saving of £375.

HMRC have agreed the alternative calculation is correct and are making arrangements to change the example.

We are grateful to Tim Good of The Professional Training Partnership for bringing this to our attention.

Anonymous