Interest and Dividends - The Book-keepers Forum (UK)

Ammers · Veteran Member

Interest and Dividends

RobH · Expert

Hi Anne-Marie,

Usually you will have had tax deducted from your interest received at 20%. exceptions to this could be if you have gross interest because you have no other earnings or earnings that are less than the PA or if investment is in an ISA etc. So when completing a tax return you need the gross interest, the tax deducted and the net. Most banks and building societies will issue a statement at 5th April with this info.

With dividends, you will notice on the certificate that they come with a 10% tax credit. This is because corporation tax has already been deducted from the companies profits prior to distributions to the shareholders. In essence what this means to the recipient is that no further personal tax will be payable so long as they are not higher rate tax payers (or that the dividends take them into the higher rate).

Hope this explains things a bit for you,

Rob

Ammers · Veteran Member

Hi Rob,
Yes that does explain things. I knew you would be able to help
Cheers
AnneMarie

Ammers · Veteran Member

Hi Rob,
Sorry to pester again,
can I clarify then
When doing a tax calculation, on a very basic set of accounts/
interest and dividend is added to the rest of the income.
The tax allowance is taken off and then 20% tax is calculated onthe remainder..
This would give you the total tax due.
You would then minus from this figure 20% of the interest and dividend payments, as the interest has already been taxed before you receive it and the dividends don;t incurr any further tax as they have already been taxed at 10%, ( unless you go into the higher rate).
What is the higher rate?
and what happens then?
Sorry for all the questions
Thanks
AnneMarie

Chriss · Veteran Member

Hi Anne Marie - higher rate tax on dividends is 32.5% & 40% on interest.

Chris

Ammers · Veteran Member

Hi Thanks Chriss
I'm still confused.
Doesn't take a lot!!
If someone earnt say 45000 in wages and had 1000 interest and 500 dividends.
How would the calculation go?
I really can't get my head around it...
I'm trying to work out different scenarios to practice.
I've been trawling through hmrc website and its made things worse..../. dreadful website and only succeeded in confusing me more...
Thanks
Annemarie
p.s I worked it out to be £8592.50 Tax and £3262.80 NI
but don't think thats right...

-- Edited by Ammers on Sunday 9th of May 2010 04:17:29 PM

Chriss · Veteran Member

Hi Anne-Marie, the tax on £45,000 is 37,400x20% = £7,480.00
7,600x40% = £3,040.00
1,000x40% = £ 400,00
500x32.5%= £ 162.50
Total £ 11,082.50

Less tax credit on dividend 500x10% (50,00)
Less tax suffered on interest 1000x20% (200.00)
Tax liability £10,832.50

Ammers · Veteran Member

hi,
don't you take off the personal allowance first? before the tax is calculated?
Also, I take it, if you don't go into the higher bracket of earnings and get taxed at 40% then you don't pay the higher band for interest and dividends and therefore don't need to show it in your calculation?
Ie, its part of your income but you only calculate tax on the rest..
Also, I take it you use the gross figures for the calculation for dividends and interest...

-- Edited by Ammers on Monday 10th of May 2010 08:01:17 AM

-- Edited by Ammers on Monday 10th of May 2010 08:27:42 AM

RobH · Expert

Hi Anne-Marie,

using your figures (and making tghe assumption that £500 was received plus the 10% tax credit) I work it out as:

Emplyment income £45,000
Dividends + tax credits £555
Interest £1000

Total income £46,555

less PA (£6475)

Taxable income   £40,080

Tax
£37400 @20%          £7,480
£555 @32.5%          £180.37
£2125 @ 40%         £850
less non taxable divi (£55.50)

Total payable £8,454.87

-- Edited by RobH on Monday 10th of May 2010 08:48:26 AM

Ammers · Veteran Member

Hi rob,
I feel like a lightbulb has just gone off in my head...
by jove i think she's got it...
I completely understand it now.. I knew it shouldn't of been as complicated as I was making it but I couldn't get my head round it. I think half my problem is trying to explain what i mean..
It's been bothering me all weekend that I kept getting different answers, how sad am I...
anyway thank you both for helping... (chris as well)
annemarie

Chriss · Veteran Member

Hi Anne-Marie - sos about my calculation this morning, I know it's no excuse but I was half asleep.

Chris

Chriss · Veteran Member

Income 45,000
Interest 1000x100/80
Dividends 500x100/90
P/A 6,475

37,400 x 20% 7,480.00
1125x40% 450.00
1250x40% (Interest) 500.00
555x32.5% (Dividends) 180.38
8,610.38
Less tax credit on dividend 10% -55.50
Less tax suffered on interest 20% -250.00
Tax Payable 8,304.88

RobH · Expert

For clarity Anne-Marie,

the difference between my calc and Chris' is that I have put the £1000 interst in as gross whereas Chris has put in as net and then grossed up and deducted tax already borne. To be honest Chris' way is what you are more likely to see.

Rob

Ammers · Veteran Member

Hi Rob,
Thanks for clearing that up, it was confusing me slightly..
Thank you both for your help