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.
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.
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