Dividend Tax Allowance

[StayinAlive]

I'm not totally sure how this works.
My current plan is to take an income from my SIPP of exactly £43000 to avoid higher rate tax.
However, I will have about £50 in dividends.
The HMRC web site says "Less than £5,000. You don’t need to do anything or pay any tax".
Does this mean I don't have to declare it?
If I do have to declare it, that could mean two things.
Either it makes no difference at all and is for information, or it is added to the £43000 making £43050 and thereby putting me into the higher bracket.
The significance of that is that I am claiming the marriage allowance which, of course, would not be allowed if I became a higher rate payer.
I can't really find a definitive answer to this. Can anyone help?
Nick

[uspaul666]

Lots of examples here:

http://www.rossmartin.co.uk/directors/tax-efficient-remuneration/1591-summer-budget-2015-dividend-tax

including:
Individuals who are basic rate payers who receive dividends of more than £5,001 will complete self assessment returns from 6 April 2016.
and
If your non-dividend income is £43,000 and your dividend income is £5,000, no tax is due on your dividend.

There's also
https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed
if you want it from the horses mouth.

[BrummieDave]

My understanding is that regardless of tax bracket (non, basic, higher, upper) everyone can take £5k of dividends per year tax free.

So, for retirement purposes as an example, if you take the max 25% of your pension as tax free cash, bang in £100k in a share dealing account (ie outside of an ISA) and the same in a spouse's account, and put in something like Dividend Aristocrats ETF yielding around 4.5%, there's something approaching £10k of tax free income every year.

Agree?

[StayinAlive]

My question was really related to the mechanics of the assessment in relation to the marriage allowance, so to return to my example............
I take £43000 drawdown and have £50 in dividends. I think we all agree that there is no tax higher tax to pay. However, my "income" is still £43050 which puts me in the higher bracket even though I don't pay the tax. Looking at the SA100 for 2015/16 it specifically says "your spouse or civil partner’s income was less than £42,386" i.e. the basic limit for that year. I haven't seen a copy of the draft SA100 for 2016/17 but I assume that it says "your spouse or civil partner’s income was less than £43,001", Also on the SA100 where you declare dividends, it doesn't say only declare dividends over £5000 so presumably all dividend amounts must be declared. Put the two together and one interpretation is that I cannot claim for the marriage allowance because my income is over £43000. Any thoughts?
Nick

[helfordpirate]

Put the two together and one interpretation is that I cannot claim for the marriage allowance because my income is over £43000. Any thoughts?
Nick

That would certainly be one interpretation. The dividend allowance is not "an allowance" but a "0% tax rate" and so your total income would be as you say £43,050. This would seem to fall foul of the eligibility criteria extrapolating from the SA100 2015/16 and the HMRC guidance.

However, the actual legal definition of the eligibility is in Section 55b of the Income Tax Act 2007 and says
"b) the individual is not, for the tax year, liable to tax at a rate other than the basic rate, the dividend ordinary rate or the starting rate for savings,"
(I dont know if there have been amendments...)

While your income is over £43,000 and IF you had more income it would be taxed at the higher rate, the fact is you have no income and so NO liability.

How this will all be handled in SA100 for 16/17 is anyone's guess at this point.

[StepOne]

Of course, it isn't REALLY tax free income at all. The money has already been subject to corporation tax. That's why the 7.5% dividend tax is so insidious.

I never understood this argument about 'already been taxed'. All money is subject to taxation multiple times, generally whenever a transaction occurs, so I don't see why dividends should be any different (and technically speaking they have always been taxed - it's just that the tax credit removed any impact for basic rate payers).

Also, in terms of the new system - I think they've done it in quite a fair way. The 5000 allowance means hardly anyone is impacted and you can always use ISAs to reduce the impact. The ones taking the biggest hit are small company directors who take the majority of their salary as dividends, and have avoided income tax for years by doing this, so it seems fair enough. And I speak as one of those impacted!

StepOne

[Lootman]

I never understood this argument about 'already been taxed'. All money is subject to taxation multiple times, generally whenever a transaction occurs, so I don't see why dividends should be any different (and technically speaking they have always been taxed - it's just that the tax credit removed any impact for basic rate payers).

But the logic behind dividends being taxed in a relatively light way is to avoid double taxation. A company pays corporation tax on its profits and then pays out dividends out of the after-tax profits. If you go back about 20 or so years the rate of corporation tax was higher and so dividends started being completely tax-free to an individual unless you were a higher-rate taxpayer. Now that the corporate tax rate has been lowered, the government has started to tax dividends more, initially at the new 7.5% rate but, no doubt, that will be further increased if corporation tax is further reduced.

To see this another way, look at the way REIT's and partnerships are taxed. Neither pay corporation taxes and so, when they pay out dividends, the individual who receives those dividends pays a higher rate of tax on them. Similarly, corporate bonds pay interest that is taxed at ordinary income tax rates, because interest is subtracted from profits before corporation tax is paid.

Also, in terms of the new system - I think they've done it in quite a fair way. The 5000 allowance means hardly anyone is impacted

Hardly anyone receives more than 5K a year in dividends? If we assume the UK stock market yields 4% a year then a portfolio of just 125K will give you 5K annual dividends.

I suspect there are a lot of people who have more than 125K invested in the markets outside ISAs.

Personally I think corporation tax should be abolished since it is us that ultimately pay it anyway, one way or the other. Then dividends could be taxed at ordinary income tax rates and the whole thing would be simpler. But that discussion leads us off topic, no doubt . .

[gryffron]

In most(??) other countries dividends are an allowable expense for companies, who pay corporation tax on profits after dividends. Hence dividends are taxed entirely separately from profits, usually via a withholding tax deducted by the payer.

In the UK companies pay corporation tax first, and dividends out of post tax profit.

Either way, it is important not to have an imbalance in the levels of income/corporation/dividend taxes, or it simply encourages even more creative bookkeeping from owner operated ltd companies.

Gryff

[Gengulphus]

I never understood this argument about 'already been taxed'. All money is subject to taxation multiple times, generally whenever a transaction occurs, so I don't see why dividends should be any different ...

Yes, and the phrase "double taxation" basically has the same problem with it - all money is taxed multiple times anyway, so why should it be a problem that money is taxed twice?

The real problem arises if there are multiple routes for money to get from A to B, and those different routes suffer very different rates of overall taxation - because that produces a strong incentive to avoid tax by using the 'wrong' route. And then you get all sorts of issues about whether an attempt is being made to deceive the taxman about what is really going on - which is the crucial difference between legal tax avoidance and illegal tax evasion...

The particular issue with dividend taxation in the UK arises for A = "money coming into a company as part of its turnover" and B = "money landing up in the bank accounts of the stakeholders in the company". One route is for those stakeholders to receive salaries from the company, in which case the money is taxed by employer's NI contributions from the company, and by Income Tax and employee's NI contributions from the stakeholder. Another is for the company to make profits and pay dividends to the stakeholder out of those profits, in which case the money is taxed by Corporation Tax from the company and by dividend Income Tax from the stakeholder. Making the overall taxation burdens from those two very different routes not be too different from each other is not an easy job - especially as all the taxes involved have all sorts of special cases involving different tax rates, sometimes very different ones.

For example, dividend Income Tax rates vary from 0% to 38.1% (or effectively even higher in some circumstances if you take the withdrawal of personal allowance above £100k taxable income into account), and for the other route, the effective tax rate ranges from 0% to 45% plus something extra for National Insurance. It's impossible to avoid there being major differences between the tax burdens of the different routes in the light of that sort of taxation-rate differences: the most the government can do is try to keep those differences low in typical cases... But that just produces an incentive for people to find ways to put themselves in the beneficial atypical cases - and when they do, the government responds by changing the rules to block the 'loophole', usually by adding further complications to the system that make it even more difficult for them to at-least-roughly-equalise the tax burdens of the different routes! E.g. for quite a while, the fashion seems to have been to create extra allowances, nil-rate bands, etc, to allow particular types of income to be taxed without imposing a need to produce tax returns on too many extra people. This has already got to the point where one can enjoy £11k of salary plus £6k of interest plus £5k of dividends plus whatever you can get in capital gains on the dividend-producing shares plus all the dividends and capital gains that you can get on assets you've already got into ISAs without paying a penny in tax - which can add up to considerably more than an average income! I'm fairly confident that at some point in the future, a government will come to the conclusion that this has gone too far...

... (and technically speaking they have always been taxed - it's just that the tax credit removed any impact for basic rate payers).

No - technically speaking dividends weren't taxed for basic-rate taxpayers and non-taxpayers for quite a few years. Company profits were, and dividends were paid out of those profits - but the tax depended on the profits being earned, not on the dividends being paid. The profits were taxed (or not taxed) regardless of whether dividends were paid or not, and the tax credits were merely an item in the tax calculation that pretended that some tax had been paid on the profits used to pay the dividend, regardless of whether it actually had been. In particular, the tax credits were available even when the company paying the dividend was a foreign company that was unlikely ever to pay tax to the UK taxman, and quite possibly based in a tax haven where it was also unlikely to ever pay tax to any foreign taxman either...

Gengulphus

[Lootman]

The real problem arises if there are multiple routes for money to get from A to B, and those different routes suffer very different rates of overall taxation - because that produces a strong incentive to avoid tax by using the 'wrong' route. And then you get all sorts of issues about whether an attempt is being made to deceive the taxman about what is really going on - which is the crucial difference between legal tax avoidance and illegal tax evasion...

Yes but that problem of "different routes" only exists because of the double taxation that we are discussing!

So to take a simple example, if I pay you 20 quid to mow my lawn and then you pay me 20 quid to walk your dog, that same 20 quid gets taxed twice as it goes back and forth. So it make sense for us to simply trade our labour and time, and pay no tax. The former artificially boosts the GDP and leads to extra tax; the latter does neither.

So the distortions and avoidances and (in some cases) evasions that you describe are actually a direct result of government policies that make that inevitable. And there is a simple way to avoid all that - avoid double taxation. One example is what I mentioned earlier - REITs are not taxed at the corporate level, only at the personal level. Conversely we could tax only corporations and not tax dividends. But do both and people will play games.

This has already got to the point where one can enjoy £11k of salary plus £6k of interest plus £5k of dividends plus whatever you can get in capital gains on the dividend-producing shares plus all the dividends and capital gains that you can get on assets you've already got into ISAs without paying a penny in tax - which can add up to considerably more than an average income! I'm fairly confident that at some point in the future, a government will come to the conclusion that this has gone too far...

That does sound generous but I think that is based more on a political viewpoint than a perspective of tax efficiency and equity. And in fact it used to be the case that investment income was taxed at a higher rate. Pre-Thatcher, there was a "surtax" on investment income (mischievously called "unearned income" at the time). So the top income tax rate of 83% actually increased to 98% in some cases.

The current thinking is the exact opposite - that investment income is taxed at a lighter rate than earned income. And the reason seems obvious - at least to me. You can't lose money by showing up at work, but you can lose money by investing in a venture that goes wrong. The relatively light tax treatment reflects the extra risk and the desirability of people being willing to take risk to create jobs and prosperity.

Probably venturing into off-topic politics but I think it helps people understand why the tax rules are the way they are, and not "unfair" in an important sense. After all, there is global competition for capital and if the UK taxes capital at a higher rate than elsewhere, then capital will flee elsewhere.

[StepOne]

You got it spot on there Lootman. Dividends used to be taxed much more lightly than salaries to encourage investment in business, it was seen as a "jolly good thing" for many years. Sadly, I think feeding the UK's ravenous spending machine now comes as a higher priority for HMG.

But the problem is that so many people were incorporating themselves to avoid income taxes, because dividends were taxed so lightly. IR35 does not seem to have done much to help this, so they tax dividends instead to make it less of an advantage.

StepOne

[StepOne]

So the distortions and avoidances and (in some cases) evasions that you describe are actually a direct result of government policies that make that inevitable. And there is a simple way to avoid all that - avoid double taxation. One example is what I mentioned earlier - REITs are not taxed at the corporate level, only at the personal level. Conversely we could tax only corporations and not tax dividends. But do both and people will play games.

So, the way I look at it, if you try to simplify, or even go as far as removing one type of, taxation (whether it's corporate or dividends) then people will set themselves up to draw money using the lowest tax route. This is why so many IT contractors have set up as limited companies. You need to tax both routes to remove this possible advantage.

In terms of numbers impacted - how many people actually have six figure shareholdings outside ISAs - I still think the number is low - must be well under 1% of the population. I just spent some time on the HMRC site to see if there were any numbers given at the time about how many people would be impacted by the tax change, but there is nothing I could find - although detailed analysis is given for all the 'key' policy announcements - this does not seem to have been classed as 'key' - it's listed alongside the standard tax band/rate changes.

StepOne

[Lootman]

So, the way I look at it, if you try to simplify, or even go as far as removing one type of, taxation (whether it's corporate or dividends) then people will set themselves up to draw money using the lowest tax route. This is why so many IT contractors have set up as limited companies. You need to tax both routes to remove this possible advantage.

Yes, I agree, although I'd express the real problem as being that the tax code is complicated and anomalous, which creates arbitrage opportunities for people to make one choice rather than another. As Gengulphus also said, the government makes a lot of effort to create extra tax rules to block loopholes, thereby opening up opportunities for other loopholes, and so the cat-and-mouse games roll on inexorably.

Why is it that way? Because government see taxes as more than just a means of revenue. Government also uses the tax code to try and manipulate behaviour, through what is effectively either bribery or blackmail. Otherwise why not just have a flat 15% tax rate for everything (income, interest, dividends, gains, VAT, IHT etc) with no allowances and exemptions? There would be very little avoidance and evasion in that case.

In terms of numbers impacted - how many people actually have six figure shareholdings outside ISAs - I still think the number is low - must be well under 1% of the population. I just spent some time on the HMRC site to see if there were any numbers given at the time about how many people would be impacted by the tax change, but there is nothing I could find - although detailed analysis is given for all the 'key' policy announcements - this does not seem to have been classed as 'key' - it's listed alongside the standard tax band/rate changes.

Honestly I have no idea, but I do know a few people in that position. What I don't know is how representative I am of the population as a whole.

[Gengulphus]

The real problem arises if there are multiple routes for money to get from A to B, and those different routes suffer very different rates of overall taxation - because that produces a strong incentive to avoid tax by using the 'wrong' route. And then you get all sorts of issues about whether an attempt is being made to deceive the taxman about what is really going on - which is the crucial difference between legal tax avoidance and illegal tax evasion...

Yes but that problem of "different routes" only exists because of the double taxation that we are discussing!

No, the "different overall tax rates on different routes" problem can exist with only one instance of taxation on each route, if they're at different rates. And it can fail to exist when there is double taxation on one or both of the routes, e.g. if one route involves a 40% tax rate and the other involves a 25% tax rate followed by a 20% tax rate.

So "different overall tax rates on different routes" and "double taxation" are independent of each other - either can exist without the other - and it's the former that is the problem.

Gengulphus

[Lootman]

So "different overall tax rates on different routes" and "double taxation" are independent of each other - either can exist without the other - and it's the former that is the problem.

Yes, certainly they are independent. However, in cases where there is double taxation then the effective tax rate you will suffer may be increased by virtue of the taxman having more than one bite of he same cherry. The more times the same money is taxed, the higher the effective look-through tax rate becomes, and so the more attractive another route appears to be. So both can be a problem

That said, I do not think that high rates are the only reason why people seek to avoid tax, although saving money is the obvious driver. The approach that people take towards tax also depends on whether they view the tax regime as being too complicated and onerous to comply with, or too unfair and selective to feel support for, or even their political view of the government.

As an example, when CGT was at 40% I made a lot of effort to ensure I never owed any. When the system was simplified, by getting rid of indexation, I was more happy to pay CGT even in cases where I might have paid less under the old indexation rules than under the new simplified rule with lower rates. The value to me was not having to perform all those indexation computations.

I'd also cite inheritance tax as a tax that many people go to great lengths to mitigate, partly because they feel it is unfair and invasive. But I am digressing somewhat and so will leave it there.

[JMN2]

Pre-Thatcher, there was a "surtax" on investment income (mischievously called "unearned income" at the time). So the top income tax rate of 83% actually increased to 98% in some cases.

Apparently 750k British taxpayers in 1974 were slapped with 98% rate. Keith Richards had to move abroad in order to be able to pay the tax that was incurred on him.

[gadgetmind]

How this will all be handled in SA100 for 16/17 is anyone's guess at this point.

I don't have the Marriage Allowance in my retirement spreadsheet as my £5k of dividends would push me beyond £43k (£45,450 in 2018) and my wife's £5k would push her beyond £11,620 in 2018. However, as she wouldn't be paying any tax, and I wouldn't be paying at more than basic rate, should we be eligible to claim?

Maybe I need to call HMRC nearer to the date, or just apply and see what happens!

[tjh290633]

Looking at my tax calculation for 2015-16, it says:

Income Tax charged £xxxxx
minus Married Couple's Allowance £yyyyy x 10% £yyyy
minus Surplus Married Couple's Allowance from spouse £zzzz x 10% £zzz
Income Tax due after allowances and reliefs £wwwww

I don't see why this treatment should change.

The next line is:

minus 10% tax credits on dividends from UK companies (not repayable)

Which will obvously not apply this year.

TJH

[StayinAlive]

Looking at my tax calculation for 2015-16, it says:

Income Tax charged £xxxxx
minus Married Couple's Allowance £yyyyy x 10% £yyyy
minus Surplus Married Couple's Allowance from spouse £zzzz x 10% £zzz
Income Tax due after allowances and reliefs £wwwww

TJH

My original query was in relation to the Marriage Allowance and not the Married Couple's Allowance, to which I am not entitled.
NB

[tjh290633]

My original query was in relation to the Marriage Allowance and not the Married Couple's Allowance, to which I am not entitled.
NB

Sorry, being rather ancient I had not picked up on that.

TJH