I appreciate that this has been mentioned on many threads before, but I don't believe ever succinctly, or at least ever succinctly enough for me to understand fully.
For the examples below, I'm using 2007-2008 tax bands:
Personal allowance: £5,225
To higher: £34,600
If I've contributed £5,148 into a personal pension (relief at source), I believe my tax-free allowance increases to £6,600 (£5,148 / 78 * 100) = £11,825.
If this assumption is wrong, I'll change the following calculations accordingly.
If I earn £5,220 a year, the maximum dividends I can receive to take me to the higher tax band is:
Allowance to higher band: £11,825 + £34,600 = £46,425
Dividend to receive: (£46,425 - £5,220 (salary)) / 0.9 (tax credit) =£37,084.50 (net dividend)
So, I pay no tax on this sum, but the 10% tax credit affects the total dividend I can take up to the higher amount by £4,120.50.
In a second example, if I were to take £50,000 as net dividends (£55,555.56 gross), the tax due would be:
Allowance to higher band: £11,825 + £34,600 = £46,425
Dividend taxable at higher rate: £55,555.56 - (£46,425 - £5,220) =£14,350.56
Tax Paid: £14,350.56 * 0.225 = £3,228.88
I think my workings are right - I wouldn't write them down if not - but I can't seem to exactly replicate other calculators. An example of this is the one found at http://calculator.contractoruk.com/, which has an example as follows:
Gross Salary: £5,220
Net Dividend: £50,000
Pension Contributions: £0
Now my calculations would make it as follows:
Allowance to higher band: £5,225 + £34,600 = £39,825
Dividend taxable at higher rate: £55,555.56 - (£39,825 - £5,220) =£20,950.56
Tax Paid: £20,950.56 * 0.225 = £4,713.88
...but the calculator works out the dividend taxable as £20,946, which admittedly isn't far off, but isn't the same!
http://calculator.contractoruk.com/
Is this a similar situation to NI, where the percentages quoted (12.8%), aren't the actual values used in the formal calculations (need to refer to the NI tables)?
For the examples below, I'm using 2007-2008 tax bands:
Personal allowance: £5,225
To higher: £34,600
If I've contributed £5,148 into a personal pension (relief at source), I believe my tax-free allowance increases to £6,600 (£5,148 / 78 * 100) = £11,825.
If this assumption is wrong, I'll change the following calculations accordingly.
If I earn £5,220 a year, the maximum dividends I can receive to take me to the higher tax band is:
Allowance to higher band: £11,825 + £34,600 = £46,425
Dividend to receive: (£46,425 - £5,220 (salary)) / 0.9 (tax credit) =£37,084.50 (net dividend)
So, I pay no tax on this sum, but the 10% tax credit affects the total dividend I can take up to the higher amount by £4,120.50.
In a second example, if I were to take £50,000 as net dividends (£55,555.56 gross), the tax due would be:
Allowance to higher band: £11,825 + £34,600 = £46,425
Dividend taxable at higher rate: £55,555.56 - (£46,425 - £5,220) =£14,350.56
Tax Paid: £14,350.56 * 0.225 = £3,228.88
I think my workings are right - I wouldn't write them down if not - but I can't seem to exactly replicate other calculators. An example of this is the one found at http://calculator.contractoruk.com/, which has an example as follows:
Gross Salary: £5,220
Net Dividend: £50,000
Pension Contributions: £0
Now my calculations would make it as follows:
Allowance to higher band: £5,225 + £34,600 = £39,825
Dividend taxable at higher rate: £55,555.56 - (£39,825 - £5,220) =£20,950.56
Tax Paid: £20,950.56 * 0.225 = £4,713.88
...but the calculator works out the dividend taxable as £20,946, which admittedly isn't far off, but isn't the same!
http://calculator.contractoruk.com/
Is this a similar situation to NI, where the percentages quoted (12.8%), aren't the actual values used in the formal calculations (need to refer to the NI tables)?
