If I am a higher rate tax payer and I hold 200,000 5% £1 preference shares, after one year what will my actual return % be (it will be slightly different than 5%) after taking into account my dividend income, income tax payments (32.5%), and deducting the tax that was taxed at source (tax credits)?
I'm having a lot of trouble working out this rather simple question, I'd like someone to show me the steps to calculating this.
If I am a higher rate tax payer and I hold 200,000 5% £1 preference shares, after one year what will my actual return % be (it will be slightly different than 5%) after taking into account my dividend income, income tax payments (32.5%), and deducting the tax that was taxed at source (tax credits)?
I'm having a lot of trouble working out this rather simple question, I'd like someone to show me the steps to calculating this.
Thank you all.
Ed.
The dividend you should receive annually is 5% x £1 (nominal value of each share) x 200,000 shares = £10,000
The associated tax credit on the dividend: £10,000 x 1/9 = £1,111.11
Therefore, total dividend plus tax credit = £11,111.11
Higher rate tax on dividend = £11,111.11 @ 32.5% less tax credit
Also bear in mind that your actual income from this shareholding will be dependent on the financial situation of the company you invested in. "Preference shares" does not mean guaranteed dividend, the company must make enough profit to pay out the full 5% dividends to you. This is something that some investors fail to understand and get caught out when the company is not doing well and they think their investment is still going to pay.
Fabs
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