A question about income exceeding £125,140

Hello,

I have a problem with a question in Kaplan’s study text. Basically it’s an individual who has £50,000 annual salary and received dividends of £597,000. The question is specifically about the tax implications of the dividends received.

As his income exceeds 125,140 he looses his personal allowance. The problem is how exactly to calculate his tax liability on the dividends.

This is the way I calculate it:
37,700×20% (non-savings, basic rate) = 7,540
12,300×40% (non-savings, HR) = 4,920

2,000×0% dividends nil rate band = 0

And here I calculate the remaining higher rate band as follows :
(150,000-37,700) – 12,300 – 2,000 = £98,000
So, £98,000 x 33.75% =33,075

And the remaining dividends (597,000-2,000-98,000= £497,000) are taxed at 39.35% = £195,073.

However, the answer in the study text confuses me. Their way of calculating the remaining higher rate band is as follows:

Non-savings taxable income increases with the amount of the lost personal allowance:
£50,000+£12,570=£62,570

Then the remaining higher rate band to be used for the dividends is:

150,000 less 2,000 (DNRB) less £62,570 = £85,430 to be taxed at 33.75% and 509,570 to be taxed at 39.35%.

So their income tax computation is:

First £2,000 = 0
Next 85,430×33.75% = 28,833
(£597,000-£85,430-£2,000) = 200,516
Plus: Loss of PA (£12,570×40%) = 5,028

Total tax payable 234,377

I don’t understand why they increase the taxable income with the amount of the personal allowance and if they do, shouldn’t they deduct it later? And why do they calculate the whole loss of the personal allowance at 40% when actually only £12,300 of the non-savings income will be in the higher rate band and dividends are taxed at 33.75%.

Can you please let me know what am I doing wrong, or is the calculation shown in the study text incorrect?

Thank you so much for your help!