swill453 wrote:Gengulphus wrote:UK dividends
You do not pay tax on the first £2,000 of dividend income you receive (the dividend allowance). You pay tax on dividends above the dividend allowance at the following rates:
• 7.5% on dividend income within the basic rate band
• 32.5% on dividend income within the higher rate band
• 38.1% on dividend income within the additional rate band
Include all of your dividend income, even if it’s less than £2,000, as it will count towards your basic or higher rate bands and may affect the rate of tax that you pay on dividends received in excess of the £2,000 allowance.
The bit I've underlined makes it pretty clear, I think!
One other point is that what you've quoted is in the "Tailor your return" stage of the online tax return. That means that your answers to it are being used to decide what questions you need to be asked at a later stage, not as answers to those questions. It's conceivable that they'll be combined with other "Tailor your return" answers to decide e.g. that someone who says they have no more than £2000 of UK dividend income
and they don't have any foreign dividend income
and they don't have to complete the capital gains section of the tax return doesn't need to be asked for an exact figure for their UK dividend income. (Having said that, I don't think it's very likely that the online tax return is that sophisticated about the questions for which it ends up asking for exact figures!)
I'm a little confused about the interaction between dividends and the tax bands. Do you know how it works in an "edge" case?
Let's say a person has earnings of exactly £12,570, and dividends of exactly £2000. Is any tax payable?
In that particular "edge" case, you have non-dividend income of £12,570 and dividend income of £2,000. You match the non-dividend income against the personal allowance and tax bands first: it precisely matches the personal allowance and doesn't match any of the tax bands, assuming we're talking about the current 2021/2022 tax year (*). You then match the £2,000 of dividend income: it matches the first £2,000 of the basic-rate band. The non-dividend income is untaxed because it's within the personal allowance, and the dividend income is taxed at 0% because it's covered by the dividend allowance, so no tax is due. If you didn't have the dividend income, no tax would be due - so this is an "edge" case where the £2,000 of dividend income makes no difference to the tax due.
An "edge" case where the £2,000 of dividend income would make a difference: again in the current 2021/2022 tax year, someone earns exactly £48,270, has dividend income of exactly £2,000, and net capital gains of exactly £14,300 (none of them from residential property). Their non-dividend income matches their personal allowance of £12,570 and the first £35,700 of their £37,700 basic-rate band, then their dividend income precisely matches the remainder of their basic-rate band. Their CGT allowance of £12,300 absorbs all but £2,000 of their net capital gains, so they have £2,000 of taxable capital gains. With their basic-rate band completely matched to income, those gains are taxed at 20%. So they end up paying 20% of £35,700 = £7,140 Income Tax on their non-dividend income, no tax on their dividend income because it's within their dividend allowance, and 20% of £2,000 = £400 CGT, for a total tax bill of £7,540.
If they didn't have the £2,000 dividend income, then £2,000 of their basic-rate band would remain unused after matching their income to it, and so their taxable capital gains would lie entirely within their unused basic-rate band, so that the tax rate which applies to all of them is 10% (**). So they would end up paying £35,700 = £7,140 Income Tax on their (entirely non-dividend) income, and 10% of £2,000 = £200 CGT, for a total tax bill of £7,340.
Net result: in that "edge" case, the dividend income is still covered by the £2,000 dividend allowance and so still attracts no tax itself, but the fact that it is matched to the tax bands makes a difference to the CGT payable and so the dividend income does indirectly affect the tax payable...
(*) If we're instead talking about the 2020/2021 tax year that people may currently be preparing tax returns for, it would match the entirety of that year's £12,500 personal allowance plus the first £70 of the basic-rate band, and then the dividend income would match the next £2,000 of the basic-rate band. So 20% of £70 = £14 tax would be due on the non-dividend income, but nothing more for the dividend income - and again, if one didn't have the dividend income, the tax due would still be £14.
(**) If they had more than £2,000 taxable capital gains, a tax rate of 10% would apply to the first £2,000 and 20% to the rest.
onthemove wrote:Hmmm.... I wonder if this is causing some of the confusion...
https://www.gov.uk/tax-on-dividends"You do not need to tell HMRC if your dividends are within the dividend allowance for the tax year."
That does look at least a bit misleading, but I suspect that it's got a couple of implicit provisos - with them made explicit, it would be something like "You do not need to tell HMRC if your dividends are within the dividend allowance for the tax year, provided you have no other reason to tell HMRC about the tax year. Also, this is only about your obligation to tell HMRC about things off your own bat - it does not override obligations HMRC explicitly imposes on you, for example by requiring you to fill in a tax return or by launching an enquiry into your tax return."
Certainly that would deal with the cases where having dividend income within the £2,000 dividend allowance affects the amount of CGT payable, because if you've got CGT payable for a tax year, then either HMRC has required you to fill in a tax return, or if they haven't, you're obliged to inform them about it by the October 5th six months after the end of that tax year.
And it would be plain silly if having dividend income within the £2,000 dividend allowance relieved you of all obligations to tell HMRC about anything!
Gengulphus