Tax question - does income in ISA count towards personal allowance calcs?

[lizbubb]

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I earn between 100 and 125 K which means I have a reduced personal allowance.

That income includes dividends from shares held outside an ISA. This amount is below the dividend tax limit so in theory not taxed, but because of the personal allowance reduction in practice it's effectively adding to my tax bill at 0.5 * higher rate.

If I move the shares into an ISA, will the dividend income no longer affect my personal allowance?

[XFool]

If I move the shares into an ISA, will the dividend income no longer affect my personal allowance?

Correct. There is no entry on an HMRC Tax Return for reporting income or capital gains/losses in an ISA.

AFAIK this also applies if the dividend income in the ISA is subsequently withdrawn.

[Alaric]

If I move the shares into an ISA, will the dividend income no longer affect my personal allowance?

All transactions and activity in an ISA are invisible as far as taxation is concerned. You can only move £ 20,000 worth into an ISA in a year and it has to be done, notionally at least, by selling the shares, transferring cash and then repurchasing.

[lizbubb]

Thanks all. I've been intending and failing to move the shares into an ISA for ages and I wasn't sure whether the dividend limit meant there wasn't much point now, but if it protects some of my personal allowance there definitely is!

[fca2019]

See you've been answered. But add if you have spouse and/or children you can make you of their allowances. Couple with 2 kids £48k 19-20 and another £48k 20-21 from 6 April.

[PinkDalek]

[That income includes dividends from shares held outside an ISA. This amount is below the dividend tax limit so in theory not taxed, but because of the personal allowance reduction in practice it's effectively adding to my tax bill at 0.5 * higher rate. ...

How so and are you certain? I do understand the personal allowance restriction but not the impact of dividends if below £2,000.

[PinkDalek]

[But add if you have spouse and/or children you can make you [use] of their allowances. Couple with 2 kids £48k 19-20 and another £48k 20-21 from 6 April.

Not certain which allowances you mean but I doubt the OP can change who receives their salary. The present dividend level is below £2,000 so no apparent need to change the beneficial owner by way of Gift or otherwise, subject to the OP replying on my query, and then there's the question of the > £100 per parent legislation if the children are minors. Such that the income remains that of the parent for Income Tax purposes.

https://www.gov.uk/savings-for-children

If your figures are an attempt to multiply the personal allowance by 4, they should be £50,000 for both tax years.

https://www.gov.uk/income-tax-rates
https://www.gov.uk/government/publications/income-tax-personal-allowance-and-basic-rate-limit-from-2019-to-2020/income-tax-personal-allowance-and-basic-rate-limit-from-2019-20 assuming enacted.

Your £48,000 may be a reference to 4 x the CGT Annual exempt amount:

https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances

[swill453]

[But add if you have spouse and/or children you can make you [use] of their allowances. Couple with 2 kids £48k 19-20 and another £48k 20-21 from 6 April.

Not certain which allowances you mean but I doubt the OP can change who receives their salary. The present dividend level is below £2,000 so no apparent need to change the beneficial owner by way of Gift or otherwise, subject to the OP replying on my query, and then there's the question of the > £100 per parent legislation if the children are minors. Such that the income remains that of the parent for Income Tax purposes.

I think it was ISA allowances. 2 x £20,000 plus 2 x junior ISAs @ £4368 each.

Scott.

[PinkDalek]

[I think it was ISA allowances. 2 x £20,000 plus 2 x junior ISAs @ £4368 each.

Yes, quite possibly, well fathomed.

[lizbubb]

[That income includes dividends from shares held outside an ISA. This amount is below the dividend tax limit so in theory not taxed, but because of the personal allowance reduction in practice it's effectively adding to my tax bill at 0.5 * higher rate. ...

How so and are you certain? I do understand the personal allowance restriction but not the impact of dividends if below £2,000.

Based on my SA tax calculations for the last few years, yes. Couldn't work out why I had additional tax to pay when my dividends were below the limit and everything else was PAYE, then realised it's the personal allowance going.

This from https://www.gov.uk/tax-on-dividends, bold mine:

Example
You get £3,000 in dividends in the 2019 to 2020 tax year. The dividend allowance is £2,000, so this means you pay tax on £1,000 of your dividends.

Your other taxable income is £35,000. Add this to your dividends of £3,000 and your total taxable income is £38,000.

You pay a rate of 7.5% on £1,000 of dividends because your total taxable income is within the basic tax band.

So the way I read that (and backed up by what actually happens with my tax return) the whole amount is considered taxable income, even though not all of it is taxed.

so, say I earn 100K salary. I'll pay 0% on 12,500, 20% on 37,500 and 40% on 50,000

Add in 2K dividends gives income of 102K. Although the 2K dividend income itself is untaxed, my income is 102K. As I lose £1 personal allowance for each £2 over £100K, I lose 1K allowance so the split for my 100K is now 0% on 11,500, 20% on 37,500 and 40% on 51,000


I would LOVE to be wrong about this though!

[PinkDalek]

[So the way I read that (and backed up by what actually happens with my tax return) the whole amount is considered taxable income, even though not all of it is taxed. ...

Thanks and I think you may be correct. I think the dividend allowance is misnamed and effectively uses some of the basic rate banding or something like that anyway. There's been so many discussions on the subject both here and at TMF I've forgotten what actually happens.

I might take a look at my hard copy returns and HMRC's tax calculation, if I remember.

[DrBunsenHoneydew]

That's right - the £2000 dividend issue is a nil-rate tax band, not an allowance. (As is the similar cash interest £500/£1000 "allowance").
The £2000 does not reduce your 'taxable income', so if you had a taxable income of £101000 including all dividends you're going to lose part of your personal allowance, notwithstanding the £2000.
Similarly if your taxable income slightly exceeds £110000 including dividends, savings interest etc, and depending on your level of pension contributions, you're at risk of having your pension annual allowance tapered too (as well as your personal allowance). This can cause a massive 'cliff-edge' effect of huge tax clawbacks for small extra tax-free dividend income.

[lizbubb]

Similarly if your taxable income slightly exceeds £110000 including dividends, savings interest etc, and depending on your level of pension contributions, you're at risk of having your pension annual allowance tapered too (as well as your personal allowance). This can cause a massive 'cliff-edge' effect of huge tax clawbacks for small extra tax-free dividend income.

Well that sucks. I think it’s time to find a tax adviser

[XFool]

[So the way I read that (and backed up by what actually happens with my tax return) the whole amount is considered taxable income, even though not all of it is taxed. ...

Thanks and I think you may be correct. I think the dividend allowance is misnamed and effectively uses some of the basic rate banding or something like that anyway. There's been so many discussions on the subject both here and at TMF I've forgotten what actually happens.

Snap!

And I still remember(?) the first year the Personal Savings Allowance came in it was ADDED TO my Personal Allowance to give a 'Total tax-free amount' on my Tax Code calculation. This appeared to change in the subsequent and following years, resulting in the strange event of a one off £500 reduction in my 'Total Tax-free amount' despite the Personal Allowance being increased by £500 in that year...