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Should the dividend allowance be applied to the higher rate tax band?

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    Should the dividend allowance be applied to the higher rate tax band?

    I'm curious as to which tax band a dividend allowance should be applied to?

    My accountant says it must must be deducted from the basic rate portion, thereby only giving me £32,500 at basic rate instead of £34,500 for 2018/19. However, looking at the HMRC guidance, it appears that I should get the full £34,500 basic rate, which would offset the dividend allowance against the higher rate band amount instead - which is £500 more tax efficient.

    The HMRC guidance at Dividend Allowance factsheet - GOV.UK unambiguously describes the higher rate band in their example 6:
    "Of the £9,000 dividend income, £3,000 is covered by the balance of Personal Allowance, which leaves income of £6,000 in excess of the basic rate band. The dividend allowance covers £5,000 of this leaving £1,000 of dividends to be taxed at higher rate (32.5%)." (my emphasis)

    So the dividend allowance in this example clearly reduces the higher rate amount while leaving the full basic rate band.

    The allowance was reduced from 5k to 2k since this guidance was published, but have any other rules changed? Is the HMRC guidance wrong? I can't find any official information to the contrary. How should the dividend allowance be applied?

    Also, looking at the terminology on the published tax bands [link], it also describes it as "Income after allowances" (plural). So in my interpretation: we take off the personal, dividend, savings, and other allowances, then we get £34,500 @ basic rate (7.5% for divis), then the balance at higher rate.
    Last edited by MikeP; 15 October 2019, 15:13.

    #2
    The dividend zero rate band applies to whatever tax band your dividend income falls into after accounting for any personal allowance. This depends on a) your other income and b) how you have allocated your personal allowance. The example you refer to deliberately allocates only £8k of the personal allowance to the non-dividend income and reserves £3k of the personal allowance for the dividends (on top of the dividend zero-rate band).

    Using the same numbers/tax bands from that example, if you allocated all of the personal allowance to the non-dividend income:

    £11k in personal allowance
    Remaining £29k taxed within the basic rate band, leaving £3k of the basic rate band left.
    First £5k out of the £9k dividends taxed at zero rate, bringing total income up to £45k, £2k into the higher rate tax band.
    Last £4k of dividends taxed at the higher rate.

    If its easier, think of it this way: when adding up your income to see which tax band it falls into, dividends are the top slice.

    The personal tax allowance is always applied to any income before any other specific allowances like the dividend zero rate "allowance".

    By allocating £3k of the personal allowance to the dividend income in the HMRC example, the dividend allowance gets applied at the point the income moves into the higher rate band, rather than £3k before it. You pay basic rate income tax on an extra £3k of your normal income but save on the higher rate tax on £5k of your dividend income instead.

    What you can't do, is arbitrarily apply the dividend allowance to any dividends that fall within the higher rate tax band. As most of us take salaries below the personal allowance then dividends, our dividends will generally start from somewhere within the personal allowance, meaning the dividend allowance will always be applied to the first dividends that go over the personal allowance threshold, i.e. it will apply to dividends within the basic rate band.
    Last edited by TheCyclingProgrammer; 15 October 2019, 16:18.

    Comment


      #3
      NOTE: the dividend allowance is no longer £5K, it was reduced to £2K. Otherwise, as above. OP got it right but TCP, who is always right about everything, used £5K without clarifying that.

      Comment


        #4
        Originally posted by TheCyclingProgrammer View Post
        The dividend zero rate band applies to whatever tax band your dividend income falls into after accounting for any personal allowance. ...
        ...
        meaning the dividend allowance will always be applied to the first dividends that go over the personal allowance threshold, i.e. it will apply to dividends within the basic rate band.
        First of all, many thanks for your comprehensive reply!
        I understand the logic of what you are describing and if those are the rules then I'm ok with it. However I cannot find any guidance on the HMRC site that it is so. As I said, the best interpretation I can get is that the basic rate band is the first £34,500 "after allowances". There is no prioritization or sequencing of allowances anywhere.

        And searching around the web, I've found inconsistencies between dividend calculators too. This one for example applies the full basic rate band:
        𝗗𝗜𝗩𝗜𝗗𝗘𝗡𝗗 𝗧𝗔𝗫 𝗖𝗔𝗟𝗖𝗨𝗟𝗔𝗧𝗢𝗥 𝟮𝟬𝟭𝟵/𝟮𝟬𝟮𝟬 𝗮𝗻𝗱 𝟮𝟬𝟭𝟴/𝟮𝟬𝟭𝟵 - Income Tax Calculator
        And I just tested it again with your explanation that it behaves differently when the PAYE drops below the personal allowance. The threshold remains the same if you use a 10k or 20k employment income.

        I also have info from different accountants with both variants.

        So, while I'm not saying you're wrong, I've found several examples of the two opposing versions of right and am still looking for evidence as to which one is the 'right' right. The difference is £500, so I believe it's worthwhile getting to the bottom of it. If it really is this convoluted, then I'd expect to see some HRMC guidance on it.

        Comment


          #5
          Well, now, this is interesting. That HMRC page has changed. How do I know? I found an article that linked to it and quoted from it, specifically in regard to the sixth example. How the new dividend tax works

          The article describes exactly what TCP has described above. It is exactly how we were all told the dividend allowance worked. Now, however, the HMRC guidance does NOT match what the article said and what TCP has said. And most more recent articles are matching the current version of the HMRC guidance, which certainly does appear to take the dividend allowance off the top slice of dividend tax.

          So, it appears that either the rules changed or that the whole world accepted faulty guidance back then which has now been quietly changed. I wonder how many calculators and accounting systems are not matching current guidance. I wonder if HMRC's system matches current guidance. I wonder what the actual legislation says.

          Comment


            #6
            Wow, I guess that explains a lot! The older version is quite specific to the sequencing of allowances.

            So I'm back to my original quest for evidence. I think it's probably best to write to the HMRC, but I was hoping for a quicker answer than the several weeks it usually takes them to respond.

            I did ring them up and ask, and the chap I spoke to said the full basic rate band should be taxed and, "the dividend allowance doesn't come off the basic rate band". But sometimes you can ring them twice and get opposing replies, so I'm still looking for written confirmation or published evidence.

            By the way, the same rules are also applied to the savings allowance - my accountant has taken it off the basic rate band. Again, I can't find any Savings Allowance guidance from HMRC that says it should be so.

            Comment


              #7
              I went back and checked my self-assessment tax calculation on HMRC's website. Due to an unexpected dividend that rolled in from a small private shareholding in a foreign company on 3 April, I went into the higher rate band last year. Looks to me like HMRC's calculation took the £2K dividend allowance off the top -- applied it to higher rate dividends rather than basic rate.

              Comment


                #8
                It's possible their own systems do it wrong, of course.

                Comment


                  #9
                  Originally posted by WordIsBond View Post
                  I went back and checked my self-assessment tax calculation on HMRC's website. Due to an unexpected dividend that rolled in from a small private shareholding in a foreign company on 3 April, I went into the higher rate band last year. Looks to me like HMRC's calculation took the £2K dividend allowance off the top -- applied it to higher rate dividends rather than basic rate.
                  So is this a case of it splitting how it applies the personal allowance to achieve the most tax efficient result?

                  Comment


                    #10
                    Originally posted by TheCyclingProgrammer View Post
                    So is this a case of it splitting how it applies the personal allowance to achieve the most tax efficient result?
                    I'd have to go back and look at the calculation again, but I don't think so. My PA was mostly taken up with covering salary and BIKs.

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