Example 11 – Finance Act 2016 (ACCA Website)

Hi Tutor,

Please look at the below example from the student accountant in ACCA website (FA Act 2016). I do not understand why Nigel is an additional rate tapayer when his taxable income is less than 150,000 (160,000+400-11,000 = 149,400). For me, he is a higher rate taxpayer like Nook. Please confirm.

EXAMPLE 11
Nigel and Nook are a married couple. For the tax year 2016–17, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £8,000.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2016–17.

Nook has fully utilised her dividend nil rate band of £5,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £3,000 of the dividend income will therefore save income tax of £975 (3,000 at 32.5%) for 2016–17.

The effective 7.5% increase to the tax rates which apply to dividend income means that incorporating the business of a sole trader or partnership is now less beneficial from a tax viewpoint than was previously the case. The increased rates also impact on the decision whether to extract profits from a company either as director’s remuneration or as dividends.