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Dear Sir,
On page 32 of BPP study text(FA 2015) there is the following question;In 2015/16 Moria receives net dividends of £ 54,000. She has no other income. calculate Income tax payable.
My answer :
Dividend income (54000/90*100) = 60,000
(-) personal Allowance = (10,600)
Taxable Income = 49,40031,785*10% = 3,178
17,615*32.5% = 5,725
Tax liability = 3,178 + 5725 = 8,903**Taxed at Source = 60,000 * 10% = 6,000
therefore tax payable = 8,903 – 6,000 = 2,903
However BPP’s answer is different to mine.
They have calculated the tax liability in the same way as above. But when arriving at Tax payable they have deducted Taxable income*10 % i.e. 49400*10% = 4,940 as taxed at source. And according to them tax payable is 8,903 – 4940 = 3,963
Can you explain the reason ?
It is because the tax credit is restricted to only that part of the dividend income that is taxed, which is only 49,400, as there is no other income to absorb the PA leaving only 49,400 of the dividend subject to tax
Is it applicable to any situation where there is remaining PA which can be used to set off against gross dividend income? If yes, then maximum tax credit available on dividend income is 10% * Taxable dividend income (Gross dividend income – Personal allowance if available ) ?
No need for you to be thinking about this so much as it will only be an issue where not only does the PA exceed both the non savings and savings income but then the amount of the taxable dividend income exceeds the basic rate band limit!!
Focus your attention on the issues that will determine whether you pass or fail this exam not on the very unlikely possibility of a random objective testing question coming up on a most unlikely practical scenario!
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