ProperCharlie

Sorry to bring this one up again, but it has become a contentious issue at work and no-one believes what i am saying! My understanding of the situation is that *as a rough guide*, if you are a lower rate tax payer, the tax credit that goes with the dividend payment takes care of the income tax liability, and you do not end up owing extra tax. If you are a higher rate tax payer, the tax bill is equal to approximately 25% of the net sum in dividends that you have received. I know this is not exact, but it works for me cos my tax return calculated by the IR agrees with it! Can someone give me chapter and verse on this, or a link to somewhere that explains it, as I can't get my message across here!

tia

ProperCharlie

just to make it clear, the situation is that somebody (not me!) has transferred their shares to their wife. the idea being that he would avoid paying the tax on the income from the dividends paid on the shares. She doesn't work and has no income other than the dividends. The amount paid in the year in question was about £39k including the 10% considered to be deducted at source, so about 36.5k net.

ProperCharlie

please can someone sort this out! this is doing my forking head in now...

(two accountants are telling me contradictory things )

[Edited by ProperCharlie - 1/19/2004 10:21:26 AM]

EddScott

Leave it to me mate. Give us about an hour and should come up with the answer.

ProperCharlie

Thanks Edd - The point of contention seems to be due to the wife in question not having a job, therefore is she a non tax payer, are the dividends taxed as unearned income or something? it's all over my head in any case

just seems that if it works out she has to pay as much or even more tax than he would have done if he had kept the shares, whoever told him it would be a good idea to do the transfer needs a good kicking...

blair

He probably would have had to pay tax at a higher rate (assuming he is a 40% taxpayer then I think the total tax bill is about 32.5% of the dividend income including the tax treated as paid at source)

I assume that as she has no other income then she not only gets her personal allowance to offset the tax bill but also the 10% band and the basic rate band. If she is tipped over into the 40% tax bracket she will pay 40% on far less than her husband would have.
**Disclaimer**
Based on my limited understanding from doing my own return recently - for god sake don't rely on anything I've posted here

ProperCharlie

blair - what you said was basically my understanding. what i am getting told atm is that she is gonna cop 32.5% on the whole lot with no tax free allowance. it's not my wife, but even so - the sh*te is gonna fly if it turns out he has made his position worse by giving his shares away...

EddScott

How does this sound?

Dividends on UK shares are received net of 10% tax at source. This cannot be reclaimed to non-taxpayers. You used to be able to reclaim the 10% but it was stopped a while ago.

If dividend income falls within nilrate, starting rate (10%), or basic rate (22%) of income tax, it will be taxed at source at 10%.

If the individual is a higher rate tax payer, dividends are taxed at 32.5% of the gross amount.

1. The problem with this case is that becuase the wife has received "an income" of £39K she is now a higher rate tax payer and I suspect liable to the higher rate of 32.5% on the gross amount. (c£12,600)

2. Either that or you pay in bands as in income tax, so the first £30,500 (basic rate limit) is liable to 10% and the remaining 8,500 is liable at 32.5%. (c£5,800)

I have a feeling 1 is correct but haven't got time to check that I'm right in stating that at higher rate, the "Gross" amount is liable.

If no-one comes up with better I'll check the above later today.

Its a good idea to use a non-earning wife as a means of reducing tax but not a good idea to make her a higher rate tax payer as that defeats the reasons for doing it.

ProperCharlie

cheers for that, Edd.

can anyone explain who exactly are non tax payers? does this mean non uk residents or simply people who don't pay any tax?

i take this to mean simply that the 10% deemed to be deducted at source cannot be reclaimed?

sorry for going on about this...

[Edited by ProperCharlie - 1/19/2004 11:58:20 AM]

EddScott

No-one can claim the 10% back. IIRC investment companies can reclaim the 10% on UK shares but that is stopping in April.

Main questions to ask are:-

1, As she is now higher rate does she pay 32.5% on the lot or 10% for first part and 32.5% on the rest.

2, As the income is from dividends and not earned income can she still use her personal allowance (£4,615 assuming under 65)to reduce her income liable for tax. If she can she will still be higher rate.

Without knowing the full financial details, its impossible to judge any advice given.

ProperCharlie

well i've just been to the tax office (the things i do for the MD ) and they are saying the situation is thus:

calculate the gross dividend by adding the 10% back on.

take off personal allowance (tax free £4100 odd).
tax @ 10% the next £1900 odd
tax @ 22% the next £27,000 odd
tax @ 32.5% anything that falls into the higher income tax bracket.

give yourself a tax credit equal to 10% of the gross dividend.

pay the balance.

phew.

[Edited by ProperCharlie - 1/19/2004 12:34:21 PM]

EddScott

Guess the tax office will no what they are talking about but am surprised they said 22% between £1,960 and £28,540.

Oh well, better swot up on my G10 trust and taxation exam

roj

If this is her only income and was received in the tax year ended 5th April 2003:

First 4,615: 0%
Next 1,960: 10%
Next 28,540: Also 10%
The rest: 32.5%

Add together, and take off the notional tax credit to work out tax payable.

Roj
p.s. I'm a chartered accountant

ProperCharlie

thanks roj. after much searching i have found the relevant document on the inland revenue website here. what roj says is correct. what the tax office and what my accountant said is wrong .

the lower rate is 10% therefore the tax credit takes care of it.
there is no 22% rate.
the higher rate is 32.5%.

<note to self - get another bl00dy accountant>