Personal Tax - Interactive Spreadsheet Worked Example

garycash

This might sound silly but I can't get my head around the example.

Basic rate taxpayer, Dividend income received was £2000 gross (£200 tax).

So this is what I have cut and pasted from the sheet:

Step 2 – Calculate the income tax liability
We first need to deal with the non-savings income, followed by the savings income (excluding
dividend income) and finally the dividend income.
Hint: The personal allowance is first deducted from the non-savings income then savings income
(excluding dividend income) and lastly from the dividend income.
Non-savings income: (£39,000 - £9,440) x 20% £5,912
Savings income: £1,000 x 20% £200
Dividend income: £2,000 x 10% £100
Income tax liability £6,212

How can Dividend income be £100? 10% of £2,000 is £200.

CeeJaySix

10% of £2k is indeed £200...and they seem to have ignored the fact that taxable income (after PA) is >£32,010 and part of the dividend would be taxed at 32.5% (unless there is some gift relief you haven't mentioned, or pension contributions to extend the bands, or some other factor we're not seeing here).

Where is the example from?

garycash

It's on the Study Support (Personal Tax 2013, E-Learning), the very first example.
There are no pensions or Gift Aid which extend the band (I think it was designed to be studied before that).

Here is the answer provided:
Step 3 – Calculate the income tax payable
Once you have calculated the income tax liability, to reach the income tax payable all you need to do
is deduct the tax credit on dividends and then the tax deducted at source.
Income tax liability £6,212
Less: Tax credit on dividends £(100)
Less: Income tax deducted at source (£6,200 + £200) £(6,400)
Income tax repayable £288

Don't think I have ever seen a tax credit on a dividend in any worked example and the last £550 of the dividend received is at 32.5% tax. Even for arguments sake the tax credit is right, shouldn't the Income tax deducted at source be £6200 + £200 + £200?

I'm trying to think maybe that this might have been correct in a previous tax year and not for 2013. But it seems unlikely.

CeeJaySix

The idea of a tax credit on dividends is to reduce the tax payable on them as they have already been subject to corporation tax. There are a few cases where it doesn't apply but I don't think any of them come into AAT. It is NOT tax deducted at source as no tax is actually paid or due to HMRC, it's all notional; it only comes into play when working out IT payable.

I don't seem to have access to the study support sections (are they only open to student members??).

So I'm guessing a bit at the question, but normally you would have received interest of £800 (which you gross up by 100/80 as 20% interest is deducted at source on most UK bank interest, to give you the £1000 in the comp).

You have also received dividends of £1800, which have been grossed up by 100/90 as they are received net of the 10% tax credit.

You have then received a salary net of PAYE, the figures for which are as given in the question.

So it's

29,560 @ 20% = 5,912 (after 9,440 PA)
1000 @ 20% = 200
(32,010 - 29,560 - 1000) = 1,450 x 10% = 145
(2,000 - 1,450) = 550 x 32.5% = 179

Total liability = 6,436

Less div tax credit (200)
Less PAYE at source (6,200)
IT on interest at source (200)

Repayable - £164.

That's how I read it anyway, anyone see anything different?