April, 2011

Paying Tax On UK Dividends

Do you earn dividends from company shares, unit trusts or open ended investment companies (OEICs)?

If so, you pay tax on this income at different rates than you do on your income, pensions or other savings.  Our guide explains the tax rates for dividends and how you pay this tax.

Dividend tax rates for the 2011-12 tax year

The amount of tax you pay on your UK dividends depends on whether your total taxable income falls within or above the basic or higher rate income tax limits.  For the 2011/12 tax year, the basic income tax limit is £35,000 and the higher rate limit is £150,000.

  • Dividend income at/below the £35,000 basic rate tax limit – tax rate 10%
  • Dividend income at/below the £150,000 higher rate tax limit – tax rate 32.5%
  • Dividend income above the higher rate tax limit                – tax rate 42.5%

All dividends are taxed in the same way, irrespective of whether they come from an OEIC, unit trust or company share.

Dividends and tax credits

When you receive your dividend you will also receive a voucher that shows the total amount of the dividend you received and the amount of associated ‘tax credit’.

Companies pay dividends out of profits on which they have already paid – or are due to pay – tax.  The ‘tax credit’ takes account of this and is available to you to offset against any Income Tax that may be due on your ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

How tax credits are worked out

The dividend that you receive represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the ‘tax credit’.

For example, if your ‘dividend income’ is £100, you will receive £90 and the ‘tax credit’ will be £10.

How you pay tax on dividend income

The way that you pay the tax owed depends on what rate tax you pay:

  • At/below basic rate – You have no tax to pay on your dividend income because the tax liability is 10 per cent; the same amount as the tax credit
  • At the higher rate – You pay a total of 32.5 per cent tax on dividend income that falls above the basic rate Income Tax limit. In practice, however, you only owe 25 per cent of the dividend paid to you because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit
  • At the additional rate – You pay a total of 42.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit.  In practice, however, you only owe 36.1 per cent of the dividend paid to you because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit

If you normally complete a Self Assessment tax return you’ll need to show the dividend income on it.  If you don’t complete a tax return, but you have higher rate of tax to pay on your dividend income, you should contact your Tax Office.

Warning: If You have Not Paid Your Tax, Your Possessions Could Be At Risk

The Government has recently announced that it plans to invest more money to crack down on tax evasion in the UK.  HM Revenue and Customs is to take a more aggressive stance in tracking down non-payers and the Daily Mail has already uncovered evidence that strong arm tactics are being used to force Brits to pay the tax that they owe.

Government to crack down on tax evasion

The Government has announced a £900 million project to increase tax revenue and has given HM Revenue and Customs (HMRC) more powers to reclaim unpaid tax.  Around one hundred additional officers will be utilised as HMRC attempts to recoup an extra £500 million in taxes over the next four years.

David Gauke, exchequer secretary to the Treasury, said: “This government has invested £900 million in HMRC to crack down on people who break the rules.

“Expanding these teams will help make sure that we bring in the additional money that the UK needs. They aim to stop tax losses and increase tax yields by more than half a billion pounds over the next four years.”

Strong arm tactics already being used

The Daily Mail has found that strongly worded letters are already being sent to people who HMRC believe owe income tax.  The letters warn that possessions will be seized from their homes and sold at auction for a fraction of their true value.

The letters state: ‘We will now need to take action to collect your tax. We are arranging a visit to your house. We will view your possessions and list those that we will sell at auction.

‘Once listed, your belongings will become the property of HM Revenue & Customs. We strongly advise you to avoid this as it will cost you much more to pay this way and can be embarrassing.’

MPs have condemned the letters, which warn that an £800 laptop could be sold for £100 and a £2,000 flat screen TV for £200.

Mark Warburton, director of accountancy firm Grant Thornton, said: “HMRC powers were tightened by the last Government in 2009. The system is supposed to ratchet up by stages so it is only repeat offenders who feel the full force, including seizure of goods.

“But I would not expect the tactics to apply where taxpayers have been in contact with their tax office, either to dispute the tax due or where they are in financial difficulties and have asked for more time to pay.”

So, if you have unpaid tax, or you are disputing the amount of tax that you have to pay, it is vital that you speak to your Tax Office.  If not, you could run the risk of HMRC exercising its new powers and recouping the money that you owe using these methods.

Have You Taken Steps To Avoid The ‘Voluntary Tax’?

Inheritance Tax is often called the ‘voluntary tax’ as there are so many exemptions and allowances available to reduce your tax liability.  Now, the Daily Telegraph has reported that Brits pay £1.3 billion in unnecessary Inheritance Tax taxpayers due to poor inheritance tax planning, with 88 per cent of people quizzed in a recent survey saying they have done nothing to reduce the amount they will pay.

Organise your finances to avoid a large Inheritance Tax bill

The Chancellor announced in 2010 that the threshold at which people start paying Inheritance Tax will be frozen for four years at £325,000, rather than rising in line with inflation.

Karen Barrett, chief executive of consumer website unbiased.co.uk, said: “Vast sums are being paid unnecessarily in inheritance tax every year because the deceased had not made adequate provision.

“Such situations can only bring additional unwelcome stress for the deceased’s family at an already difficult time, as the tax must be paid before the estate can be released and any inheritances can be passed on.

“With the IHT threshold frozen for another three years, it is important to make sure your financial affairs are in order to protect your family and loved ones after you have gone.”

So, if you want to avoid paying Inheritance Tax, you should take steps to mitigate your liability.  Here are two easy ways.

Make a Will

This is the first step toward avoiding Inheritance Tax is to make a will.  Making a will can ensure that you leave all your assets to your spouse – a situation which results in no Inheritance Tax being paid.

However, if you die without a will you have no control over how your assets will be distributed.  Other relatives may be entitled to a share of your assets which would mean that Inheritance Tax may then be payable.

Use the Gift Exemptions

The Inheritance Tax rules allow you to make a number of different types of gifts.  The most common gifts that you can make are:

  • Annual gifts – you can give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from Inheritance Tax when you die. And, you can carry forward any unused part of the £3,000 exemption to the following tax year
  • Small gifts – you can make small gifts up to the value of £250 to as many people as you like in any one tax year
  • Potentially Exempt Transfers – any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift.  These sorts of gifts are known as ‘potentially exempt transfers’.  Remember that if you give an asset away but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a potentially exempt transfer.

Are You Keeping The Correct Tax Records?

If you pay tax in the UK it is vital that you keep a record of the tax you pay.  You should also keep any records relating to your income and outgoings.  You will need these to complete your tax return or to answer queries from HM Revenue and Customs (HMRC) about returns you have already submitted.

Why do I need to keep records?

If you complete a Self Assessment tax return, HMRC may have queries relating to your return.  They may also demand to see documents to confirm the figures you have declared.

So, you have to keep adequate tax records in order to answer these queries.  If you don’t, you may have to pay a penalty.

What tax records do I need to keep?

There are various different records you should keep depending on whether you are employed, self-employed, a pensioner or a director.  Common records you will have to keep include:

  • Income from employment – documents including your P45, P60, form P11D and information about any redundancy payments.  You should also keep details of benefits in kind, tips or gratuities and lump sum payments not included on your P45 or P60
  • Records of expenses – receipts and records of any business expenses that you have paid out of your own pocket
  • Pension records – documents including your form P160, P60 and details of other pensions (including the State Pension)
  • Savings and investment income records – building society and bank statements and passbooks, interest statements, tax deduction certificates, dividend vouchers and unit trust tax vouchers
  • Property income – records of rent received from property and the expenses you have paid

If you are self-employed you will also have to keep documents such as:

  • a record of all your sales and takings
  • a record of all your purchases and expenses

How long must you keep your records?

You are required to keep all your tax records for a certain period in case HMRC needs to check your tax return.

If you send in your tax return on or before 31 January you have to keep your records for a further year after this deadline.  For example, for a 2010-11 tax return filed on or before 31 January 2012, you must keep your records until 31 January 2013.

If you send in your tax return after 31 January you must keep your records for 15 months after the date you sent it in. For example, for a 2010-11 tax return filed on 28 February 2012, you must keep your records until 31 May 2013.

Tax Allowances in the New Tax Year 2011/12

When the Chancellor of the Exchequer delivers his annual Budget, he will generally make changes to the tax regime for the following tax year.  So, as we are now into a new tax year – 2011/12 – our guide investigates the new levels of tax allowances that have come into effect since 5th April, 2011.

Personal Allowance

Your personal allowance is the amount of money that you are able to earn before you pay any tax.  The level of Personal Allowance generally rises each tax year, and it has risen again for the tax year 2011/12.

The amount of your Personal Allowance depends on your age and your total income in the tax year – including personal interest on savings, pensions and so on.

The three levels of Personal Allowance in the 2011/12 tax year are:

  • Basic – £7,475 (with an income limit of £100,000)
  • Age 65-74 – £9,940 (with an income limit of £24,000)
  • Age 75 and over – £10,090 (with an income limit of £24,000)

If you become 65 or 75 during the year to 5 April 2012, you are entitled to the full allowance for that age group.

If you are 65 or over and your income is between £24,000 and £100,000 your age related Personal Allowance is reduced by half of the amount you have over the £24,000 limit until the basic allowance is reached.

As far as the basic Personal Allowance goes, this means that you can earn up to £7,475 in the 2011/12 tax year before you pay any income tax.

Blind Person’s Allowance

Blind Person’s Allowance for the tax year 2011-12 is £1,980.  There are no age or income restrictions.

If you are registered blind with your local authority, your Blind Person’s Allowance is added onto your Personal Allowance to determine the amount of money you can earn without paying tax.

So, if you are under 65 and claim both allowances, you can earn £9,455 (£7,475 Personal Allowance plus £1,980 Blind Person’s Allowance) before you pay any tax.

Married Couple’s Allowance

The maximum amount of Married Couple’s Allowance for the 2011/12 tax year is £7,295 and the minimum amount is £2,800.

You receive 10 per cent of the allowance amount – which means your tax saving (based on a full year’s eligibility) is at least £280 and up to £729.50. The actual amount depends on your personal income.