Declaration Divs 2020/21 self assessment

[Ifnotnow8]

I have noted that tax return for 2020/2021 has a different format.

With regards to this section - Tailor your return 09 - Dividends (UK).
“Did you receive any dividends for example UK Companies, authorized unit Trusts, oeics (up to £2000)”

I thought that no declaration for the above needed to be entered in the self assessment unless it is over £2k.

Can you please clarify? Thanks

[Gengulphus]

I have noted that tax return for 2020/2021 has a different format.

With regards to this section - Tailor your return 09 - Dividends (UK).
“Did you receive any dividends for example UK Companies, authorized unit Trusts, oeics (up to £2000)”

I thought that no declaration for the above needed to be entered in the self assessment unless it is over £2k.

I think you've managed to get the wrong impression. The first £2000 of the dividends you receive are taxed at 0%, but do use up £2000 worth of your personal allowance, basic-rate band and/or higher-rate band (depending on what other income you have). As a result, despite no tax being charged on those dividends themselves, they can affect the tax you pay - most notably, they can affect the amount of your basic-rate band left unused, which can affect the tax rates applied to capital gains. So even though the first £2000 of the dividends you receive don't attract tax themselves, I can see a reason why they do need to be declared. And I don't remember ever seeing a statement from an official source that they don't need to be declared... (I can however easily imagine someone getting muddled between whether income is untaxed and whether it needs to be declared, especially as some common forms of income such as dividends received in ISAs don't need to be declared as well as being untaxed. So I can easily imagine you having read some inaccurate information about the point somewhere...)

To try to confirm that view, I've checked the instructions for the paper tax return, which often spell things out more clearly and in more detail than those in the online tax return. I've found:

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!)

Gengulphus

[swill453]

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?

Scott.

[onthemove]

To try to confirm that view, I've checked the instructions for the paper tax return, which often spell things out more clearly and in more detail than those in the online tax return. I've found:

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!


Gengulphus

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."

[Ifnotnow8]

Yes - that’s why l am confused!

So the £2000 dividends income is counted as part of your personal allowance & must be declared. Right?

Thanks!

[Itsallaguess]

Yes - that’s why l am confused!

So the £2000 dividends income is counted as part of your personal allowance & must be declared. Right?

There's an on-line tax-calculator linked below, which seems to show that even if you have to declare the £2000 dividends, it doesn't actually affect anything due to the £2000 dividend-allowance...

Here's an example showing someone on the left earning £44,000 with no dividends, and then on the right, someone earning £44,000 with £2,000 of dividend income as well, and in both calculations there is exactly the same taxes paid, on both salary (£6,286) and dividends (£0), with the take-home pay of the right-hand employee being exactly £2000 higher than the one of the left with no dividends -



Source - https://www.itcontracting.com/calculators/dividend-tax-calculator-2021-22/

It's probably worth noting that on the above site is the following, under the 'Calculator Notes' section -

• You do not pay any tax on your first £2,000 of dividends, courtesy of the dividend allowance. This is displayed in the ‘total taxable income’ cell. Confusingly, the dividend allowance sits within your existing income tax bands when it comes to working out your overall tax liability. We often get emails about this!

Cheers,

Itsallaguess

[Lootman]

Yes - that’s why l am confused!

So the £2000 dividends income is counted as part of your personal allowance & must be declared. Right?

There's an on-line tax-calculator linked below, which seems to show that even if you have to declare the £2000 dividends, it doesn't actually affect anything due to the £2000 dividend-allowance...
Here's an example showing someone on the left earning £44,000 with no dividends, and then on the right, someone earning £44,000 with £2,000 of dividend income as well, and in both calculations there is exactly the same taxes paid, on both salary (£6,286) and dividends (£0), with the take-home pay of the right-hand employee being exactly £2000 higher than the one of the left with no dividends

It's all a bit ambiguous and confusing. I have not had to face this issue since, like many here, my annual dividend income is above £2,000 so I have to declare anyway.

But there are other types of income subject to similar allowances or exemptions. For instance I always declare capital gains even if they are below the annual CGT-free allowance. My tax returns show a pattern of realising gains and I worry it might look odd if suddenly one year there were none declared. Safer to put them in even if no CGT is owed.

On the other hand with the "rent a room" allowance, back when I had a lodger and no other rental income, I did not declare the rent as it was within the allowance. The rules stated that you should but I saw no point since no tax was due anyway.

I guess my attitude is that you can never go wrong declaring everything. But if you fail to declare some income and it has zero effect on the tax owed, then it is unlikely you would ever get into much trouble for that anyway.

In this case I guess you have to first do the sums, using a calculator like the one you used, and see if it makes any difference to the tax owed.

[swill453]

There's an on-line tax-calculator linked below

Thanks, that's answered my question above. With £12,570 income and £2000 dividends, there's no income tax to pay. I had got confused by earlier replies which seemed to say the £2000 dividends would reduce the personal allowance and leave some income liable to tax. I obviously picked that up wrong.

Scott.

[daveh]

I've not told HMRC about my dividend income for years (it was always within the dividend allowance and before that came in was not relevant), but I always had no extra tax due as I made sure I remained below the HRT band. A couple of years ago I had capital gains to pay and HMRC asked me to do a tax return on which I declared my dividend income and have done on two subsequent occasions. Bar the capital gains tax in the first year I've had no extra tax to pay (bar a few pence which I'm told is due to the rounding of the figure on the your tax code). This year they have told me I no longer need to fill out a tax return for 21/22 and onwards, so clearly they are not interested in dividend income as long as it is within the dividend allowance at won't push you into the HRT band.

[Gersemi]

It's all to do with the order of taxation of various sources of income and capital gains. Earnings come first, so savings and dividends within the nil rate bands can't push earnings into higher rates. However other sources of income such as gains on life insurance and termination payments from employment come after, so they could be pushed into higher rates.

https://www.gov.uk/hmrc-internal-manual ... l/saim1090

Capital gains are taxed at the highest rate, so this will be affected as well.

[Gengulphus]

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.

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

[1nvest]

Now we're outside of the EU the likes of Irish domiciled ETF's should have the standard 25% Irish dividend withholding taxation being reduced to 15% under the Anglo-Irish tax treaty.

How/where should that be declared within the Self Assessment? And can it be offset against UK dividend taxation?

[ursaminortaur]

Now we're outside of the EU the likes of Irish domiciled ETF's should have the standard 25% Irish dividend withholding taxation being reduced to 15% under the Anglo-Irish tax treaty.

How/where should that be declared within the Self Assessment? And can it be offset against UK dividend taxation?

As indicated in the page you linked to the Anglo-Irish tax treaty dates back to at least 2016 and I think it probably dates back a lot further than that.
I'm not aware that anything has changed because of brexit - I believe you could always get it reduced to 15%.

I believe you have to fill in a claim form

https://www.revenue.ie/en/companies-and-charities/documents/dwt/dwt-claim-for-refund.pdf

However if your ETFs are held through a nominee company then you probably have to get them to fill in the forms (many may not be prepared to deal with the hassle of doing this for Ireland unlike when reclaiming from the US).

[Alaric]

Now we're outside of the EU the likes of Irish domiciled ETF's should have the standard 25% Irish dividend withholding taxation being reduced to 15% under the Anglo-Irish tax treaty.

I don't think that's relevant as Irish domiciled ETFs don't have any Irish withholding tax. They wouldn't have been domiciled in Ireland in the first place if their tax position was worse than if they had been domiciled in the UK.

[ursaminortaur]

Now we're outside of the EU the likes of Irish domiciled ETF's should have the standard 25% Irish dividend withholding taxation being reduced to 15% under the Anglo-Irish tax treaty.

I don't think that's relevant as Irish domiciled ETFs don't have any Irish withholding tax. They wouldn't have been domiciled in Ireland in the first place if their tax position was worse than if they had been domiciled in the UK.

You are correct I was thinking of reclaiming withholding tax on shares directly held in Ireland rather than ETFs which as you say aren't subject to the Irish withholding tax.

https://www.justetf.com/uk/news/passive-investing/how-etfs-are-taxed-in-the-uk.html

How ETFs are taxed in the UK
.
.
.
Withholding tax may be deducted from dividends and interest you earn on overseas investments. UK investors are exempt from withholding tax on the income they receive from ETFs domiciled in Ireland and Luxembourg.

But you may well pay withholding tax on ETFs or other investments held in other territories, even if you hold that investment in an ISA or a SIPP.

If you are liable for withholding tax then you can usually mitigate the amount you pay thanks to country-level double taxation agreements. This normally entails completing tax forms for the overseas tax authority and declaring your overseas income on your UK tax return. Contact your platform or a tax specialist for guidance.

Note that ETF’s also pay withholding tax on the fund’s underlying assets purchased from other territories, even if they’re domiciled in Ireland or Luxembourg.

[1nvest]

My understanding is that when in the EU passporting meant that no Irish dividend withholding taxes fell due to UK investors because of being in the EU, but since having left and the UK outside of the EU that was being extended only temporarily under TPR (Temporary Protected Status - i.e. for a temporary transition period beyond Jan 2021).

So if a ETF fund based in Ireland replicates say a US stock index by buying the shares in that index in its weighted proportions, US withholding tax is 30% but as per the UK that's reduced to 15% under Irish/US tax treaty. When nominee based the shares are in the funds name. The fund issues shares whose price reflects the performance of what it invests in, and it pays out dividends the same as what its investments pay, less its fees/costs.

In the absence of passporting (Brexit) and any TPR (that I believe is still active but that might end at any time, the EU gave Switzerland just 30 days notice), the Irish domiciled ETF dividends would surely have some of the dividends it pays withheld (15% under UK/Ireland tax treaty, otherwise 25%).

So I suspect that nothing presently falls due Irish withholding tax wise for UK investors in irish based ETF's due to TPR, that could end at any time. After which and in the US stock example case there'd be 15% US withholding tax that the fund endures compounded with 15% Irish withholding tax (double taxation). If for instance inflation rose, dividend yields increased to say 5%, then the US deducts 0.75% to leave 4.25% dividends that the Irish ETF collects, maybe deducts a 0.1% fee to leave 4.15% that it pays out to a UK investor and as part of that deducts 15% Irish to UK dividend withholding tax to leave a 3.53% actual dividend received by the UK investor, and where that dividend then has UK dividend taxation applied.

I don't think that's relevant as Irish domiciled ETFs don't have any Irish withholding tax. They wouldn't have been domiciled in Ireland in the first place if their tax position was worse than if they had been domiciled in the UK.

When in the EU then the appeal was lower corporation tax and the same withholding tax made it more competitive to set up ETF firms/businesses in Ireland when serving others anywhere else in the EU (that included the UK prior to Brexit).

Fundamentally I'm just considering longer term factors, such as capital gains achieved/compounded over many years that would involve a large capital gain tax liability to 'move' from a Irish domiciled ETF to something else. States dislike ETF's as they practice such savings measures as share 'lending', where a outfit with both US and Ireland presence might see shares that are just about to go X-Div being 'lent' to wherever that dividend might be taxed less, in return for a 'borrowing' cost of the saving achieved.

I guess the general/broader answer is for UK residents to reduce the risk of tax-traps down the line by progressively tax efficiently migrating out of existing ETF's and not adding (not reinvesting dividends). Otherwise I can foresee not too far down the line where a prior cost/tax efficient Irish based ETF being held by UK investors might see the likes of 15% US dividend withholding tax, 15% Irish withholding tax and perhaps with UK dividend tax being levelled to the same as income tax, 20% for Joe Average. 42% combined taxation for basic rate taxpayers. Which could amount to investors via such funds in effect taking on 100% of the risk for none of the reward.