# Personal tax 2012 - personal allowance

Registered Posts: 2 New contributor ?
I have been taking the personal allowance off the salary income, is this correct?if so what do you do if you do not have any salary income just dividends etc??

• MAAT, AAT Licensed Accountant Posts: 1,037
hannahvic wrote: »
I have been taking the personal allowance off the salary income, is this correct?if so what do you do if you do not have any salary income just dividends etc??

In order to calculate the income tax liability of a tax payer receiving a gross salary of, lets say, £20,000 for 2011/12 you would:

1) Deduct the personal allowance from the salary, i.e. £20,000 - £7,475 = £12,525
2) Then because £12,525 is less than £35,000 (the basic rate band) you would multiple the entire £12,525 by 20%, i.e. £12,525 x 20% = £2,505.00 (income tax liability)

In order to calculate the income tax liability of a tax payer receiving a dividend of, lets say, £20,000 for 2011/12 you would:

1) Gross up the dividend by 10%, i.e. £20,000 (net dividend) x 10/9 = £22,222 (gross dividend)
2) Then, as before, you would deduct the personal allowance, i.e. £22,222 - £7,475 = £14,747
3) Then because £14,747 is less than £35,000 (the basic rate band) you multiple the entire £14,747 by 10% (the dividend rate), i.e. £14,747 x 10% = £1,475.00 (income tax liability)

In both cases, above, tax payable is going to be nil as:
1) the £2,505.00 of income tax would have been withheld by the employer at source under PAYE.
2) a dividend tax credit of £1,475.00 would be due which would cancel out the £1,475.00 of income tax liability.
• Registered Posts: 2 New contributor ?
I agree - this is what i have been doing. Tax 2012/2013 But say for instance:

Building Society Interest - 5000
Dividends - 10000

I would take off PA (8105) so would i take 5000 off the buildings and then 3105 off the dividends?

Thanks
• MAAT, AAT Licensed Accountant Posts: 1,037
hannahvic wrote: »
I agree - this is what i have been doing. Tax 2012/2013 But say for instance:

Building Society Interest - 5000
Dividends - 10000

I would take off PA (8105) so would i take 5000 off the buildings and then 3105 off the dividends?

Thanks

I would:

1) Gross up the net buildings society interest, i.e. £5,000 x 100/80 = £6,250
2) Gross up the net dividends, i.e. £10,000 x 10/9 = £11,111
3) Take £6,250 (of the £8,105 personal allowance) from gross buildings society interest, i.e. £6,250 - £6,250 = nil
4) Take the remaining £1,855 (of the £8,105 personal allowance) from gross dividends, i.e. £11,111 - £1,855 = £9,256
5) Because £9,256 is less than £34,370, I would tax £9,256 by the 10% dividend rate, i.e. £9,256 x 10% = £926 (income tax liability).

Please note that in the example, above, there would be a tax refund as a £926 notional tax credit would be due on the £9,256 (of taxable dividend), therefore the notional tax credit and income tax liability would cancel each other out to give a new tax liability of nil.

However the tax payer has already paid £1,250 of tax on their buildings society interest (which the buildings society has withheld at source).

Therefore given that the income tax liability is nil but tax paid is £1,250 this £1,250 should be refunded because nothing should have been paid (because the income tax liability is nil).
• Registered Posts: 55 ? ? ?
The personal allowance should always be deducted from income in a set way:
1. Non Savings Income (salary, rental income etc)
2. Savings Income (bank interest)
3. Investment Income (dividends)