Dividend tax allowance: necessary to claim if less than allowance?

[yorkshirelad1]

My niece was given some Diageo shares by her father a couple of years ago. She says the holding is worth about £10k, and the dividend is about £400/year. She has no other dividend income; she does have some bank interest. She has a salary which is taxed at source/payroll, and hopefully any bank interest over the personal savings allowance will be taken care of by a change to her tax code.

The dividend allowance is currently £500/year (https://www.gov.uk/tax-on-dividends), so her £400 Diageo dividends are currently under the allowance.

My question is whether she needs to declare her £400 Diageo dividend income, or does she see that it's less than the annual £500 allowance at the moment and does nothing.
If she has to declare it, does she need to do a tax return for the £400 Diageo dividend, claim the £500 dividend tax allowance and do a tax return for £0 tax? Or could it be dealt with via her tax code if necessary.

TIA (on her behalf)

[kempiejon]

2020 I declared my dividend income above the allowance via web chat HMRC. I settled the bill online there and then. The following tax year I had an adjusted tax code for my expected dividend income in that period. I contacted HMRC again via a web chat and said the amount I owed would be different and could I pay online again rather than adjust the tax code and I was able to do that.
I have never declared since as I'm now below the threshold and was never asked to do a tax return.

[SebsCat]

From 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.

[monabri]

My question is whether she needs to declare her £400 Diageo dividend income.....

No. The income is below the threshold.

[scrumpyjack]

If completing a tax return you do need to include dividends even if below the allowance

per the HMRC notes on completing the return

"Include all of your dividend income, even if it’s less than £1,000, 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 £1,000 allowance. "

[yorkshirelad1]

Many thanks for all the helpful replies: extremely useful.

[tlf67482]

My question is whether she needs to declare her £400 Diageo dividend income, or does she see that it's less than the annual £500 allowance at the moment and does nothing.

I may be wrong but "generally" if you do not owe tax (i.e. you are below the allowance) you do not need to declare it unless you are asked or required to fill in a tax form.

Something to consider is you are quite close to the limit so it wouldn't take much to take you over ie. yearly increasing dividends or a special dividend.

All you can hope for is the dividend or capital gain allowances are increased in the future - personally I do not see it happening.

[kempiejon]

All you can hope for is the dividend or capital gain allowances are increased in the future - personally I do not see it happening.

I'm calculating on them going. Reduction from £12k - £3k in a just a few years for capital gains and unlimited dividend income dropped to £500 this year from a £10k allowance introduced in 2016. Was it always uncapped before 2016?

[londoninvestor]

All you can hope for is the dividend or capital gain allowances are increased in the future - personally I do not see it happening.

I'm calculating on them going. Reduction from £12k - £3k in a just a few years for capital gains and unlimited dividend income dropped to £500 this year from a £10k allowance introduced in 2016. Was it always uncapped before 2016?

Before 2016 there was no dividend allowance, but the rate of tax on dividends was zero for basic rate income tax payers: https://www.gov.uk/tax-on-dividends/previous-tax-years.

In 2016, the rates were raised and the £5k allowance was introduced to partially compensate. In fact, some people (those with a small dividend income, but enough other income to make them higher rate taxpayers) are better off under the new system - though of course the number of such people decreases as the allowance falls.

[DrFfybes]

per the HMRC notes on completing the return

"Include all of your dividend income, even if it’s less than £1,000, 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 £1,000 allowance. "

OK, I've read that several times and I now think I actually understand it, especially after my previous arguements with HMRC.

They ADD the divi income to your total income in calculating your tax. So if you earn £12569 (a quid under the personal allowance) and £800 in divis, whilst a nomal interpretation is that your divi allowance covers the divi income and you would pay no tax, you are actually taxed at 20% of £799 of income but 0% on the divi.

Which makes me wonder what the divi allowance actually does?

Paul

[londoninvestor]

per the HMRC notes on completing the return

"Include all of your dividend income, even if it’s less than £1,000, 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 £1,000 allowance. "

OK, I've read that several times and I now think I actually understand it, especially after my previous arguements with HMRC.

They ADD the divi income to your total income in calculating your tax. So if you earn £12569 (a quid under the personal allowance) and £800 in divis, whilst a nomal interpretation is that your divi allowance covers the divi income and you would pay no tax, you are actually taxed at 20% of £799 of income but 0% on the divi.

Which makes me wonder what the divi allowance actually does?

Paul

You owe no tax in this scenario.

The HMRC guidance doesn't seem well written ("even if it's less than £1000" conflicts with "in excess of the £1000 allowance"), but it's true that there are some scenarios where receiving a dividend income of less than £1000 is not identical to receiving zero dividends. For example, if I'm reading the Child Benefit Tax Charge rules right, it looks like the entire dividend income is used when comparing the income against the threshold for the tax charge.

[DrFfybes]

OK, I've read that several times and I now think I actually understand it, especially after my previous arguements with HMRC.

They ADD the divi income to your total income in calculating your tax. So if you earn £12569 (a quid under the personal allowance) and £800 in divis, whilst a nomal interpretation is that your divi allowance covers the divi income and you would pay no tax, you are actually taxed at 20% of £799 of income but 0% on the divi.

Which makes me wonder what the divi allowance actually does?

Paul

You owe no tax in this scenario.

The HMRC guidance doesn't seem well written ("even if it's less than £1000" conflicts with "in excess of the £1000 allowance"), but it's true that there are some scenarios where receiving a dividend income of less than £1000 is not identical to receiving zero dividends. For example, if I'm reading the Child Benefit Tax Charge rules right, it looks like the entire dividend income is used when comparing the income against the threshold for the tax charge.

Ahh, so it could affect benefit entitlement, makes sense as it is income.

Thinking back my tax was actually not quite the same, IIRC I was slightly OVER the dividend allowance so they added this to my income taking me about £80 over the personal allowance then taxing the excess at 20% as income rather than 7.5%, I gave up as the postage to write a second time was making big inroads into the tenner or so I (and people on here) thought I was owed.

Paul

[londoninvestor]

Thinking back my tax was actually not quite the same, IIRC I was slightly OVER the dividend allowance so they added this to my income taking me about £80 over the personal allowance then taxing the excess at 20% as income rather than 7.5%, I gave up as the postage to write a second time was making big inroads into the tenner or so I (and people on here) thought I was owed.

Right, there are (or at least were) situations where the default Self Assessment calculation doesn't allocate the personal allowance against different income sources in the optimal way, and you need to ask HMRC to reallocate it in the optimal way. For example, the "Finlay" scenario here is one where you benefit from reallocating some of the personal allowance to dividends, and taking advantage of the Starting Rate for Savings.