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Can anyone help answer a quick question on something I find confusing?
If I have employment income of £36k and dividend Income of £7k, my taxable income after the PA would be £33,560 (2013/14).
I would have thought that the first £32,010 would be taxed at the basic rate with the remaining £1,550 taxed at the higher rate.
The employment income (after PA) of £26,560 will all be within the basic rate, and therefore all at 20%. Then I would expect the dividend income to be charged at 10% for the first £5,450 (taking it up to the BR limit of £32,010) and the remaining to be charged at 32.5% (ignoring the dividend tax credit for the moment).
However, in every question example I find where this happens, ALL of the dividend income is taxed at 10% and the fact that it takes the total taxable income over the BR band is ignored.
I know this is basic stuff but I’ve never understood why this is ignored and I can’t find an explanation anywhere.
Hi Dave,
Based on the information you given above, I have worked out as follows:
NSI- employment income £36,000
DI- dividend income £7,000 which have to gross up by 100/90 for tax purpose is £7,778Tax computation:
NSI 36,000-9,440 = 26,560 @ 20% =5,312
DI. 32,010-26,560=5,450 @ 10%= 545
———
32,010
7,778-5,450= 2,328 @ 32.5%= 757
——–
6,614
Dividend tax credit 7,778@10% = (778)
——–
Tax liability 5,836The information given is limited and I only worked out based on. It will be helpful for us to answer your question if you can reference the question no. or give us more detailed information.
Hope these will give you a little help.
KarenHi Karen,
Looks like you agree with me that some of the dividend income would be at 32.5%.
I changed the numbers slightly in my above post but was looking at the technical articles on acca’s website, here…
Specifically under part b), strategies B & C both seem to tax all dividend income at 10% even though total taxable income is above the £32,010 basic rate band.
Would be great to hear your thoughts on this example.
Hi Dave,
I just take a look at the illustration following the link. It seems the answer treated the dividend part all at 10% which actually 3744 is above BRB.
I agreed with your thought but we need someone who is more professional to correct us if it is wrong. Because it is the example in the published article which is should not be wrong.
If it is wrong answer and we followed by the way to use the same technique on exam. Who is going to judge this? We will never know why we failed.
Hope someone can answer it. Good luck any way. The exam won’t be that easy!
Finger crossed.
KarenMy answer would be
NSI = 36,000
DI 7,000 x10/9 = 7,778NSI 36,000-9,440 = 26,560 tax at 20 % = 5,312
Remaming lower rate band 32,010 – 26560 = 5,450Dividend
7,778
Tax at 10 %—–5,450 = 545
Tax at 32.5% = 7,778-5,450 = 2,328 x 32.5% = 757Total dividend tax (545+757) = 1,302
Less tax credit 10% 778Dividend tax after tax credit deduction 1,302 – 778 = 524
Total tax (5,312 + 524 ) = 5,836
Hi,
I’ve just come across this now – I’m sure you have passed this exam now so this may be irrelevant to you, however it may help someone else who may be reading this.
In the linked article, the dividend income is taxed at 10% as in both strategies B & C, the total taxable income is below the Basic Rate threshold – A) £31,100 B) £31,377. The BR threshold of the year in question was £32,010.
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