Tigerpuss was wondering how the new dividend allowance and the new tax rates might affect taxpayers. (Bright little chap, Tigerpuss!) He found some useful information on this government website. In the last of six examples he noticed something which caused him to experience a degree of Schadenfreude.
Just take a look at the wording. (Btw, the allowances and thresholds used are those for 2016/17, which came in round thousands.)
‘I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA’
The Personal Allowance should be allocated in the most beneficial way but dividend income is treated as the ‘top slice’ of income.
Of the £40,000 non-dividend income, £8,000 is covered by the Personal Allowance, leaving the balance of £32,000 to be taxed at basic rate, this uses up all of the basic rate band.
Of the £9,000 dividend income, £3,000 is covered by the balance of Personal Allowance, which leaves income of £6,000 in excess of the basic rate band. The dividend allowance covers £5,000
of this leaving £1,000 of dividends to be taxed at higher rate (32.5%).
Now Tigerpuss thought that the splitting of the Personal Allowance in this way was a devious ploy on the part of the Treasury to squeeze a bit more tax out of the richer taxpayer. Is it really the way to treat the dividend income as the ‘top slice’? His interpretation would be to apply the calculations to everything else first and then add the calculations for the dividend income on the end. TP is not a tax expert - in fact he is quite a simple soul - but even he can work out that calculating the tax in the way described above results in the taxpayer being charged £375 more tax than if the calculation were done in the more straightforward way (hence the Schadenfreude). This is simply because £3,000 is taxed at 20% instead of 7.5%.