Re: The order of taxable income for Directors?

David Floyd wrote:

In message of Fri, 14 Jul 2006, Ronald Raygun writes

I still don't see how that remark could have suggested that the
credits were refundable. They aren't, and can't be, because in
effect they don't exist.

In one respect they are refundable (albeit not directly to the
taxpayer). If you are a practising accountant you will know that making
gift aid payments when the only income is taxed dividends does not incur
the taxpayer in any further liability in respect of sufficient tax to
cover the Gift Aid payment. Tax Credits on dividends are acceptable for
covering this liability; yet the Charity(ies) concerned can reclaim the
tax the taxpayer has (so say) paid.

That's interesting, but the term "taxed dividends" I take to mean
that untaxed dividends are not eligible for this treatment.

It might be better to express "the only income is taxed dividends" as
"the only taxed income is dividends". I stand by my previous assertion
that the tax calculation method employed by HMRC does not tax dividends
which fall into the "zero rate" tax band, i.e. the Personal Allowance,
insofar as it is not used up by non-savings income ("earnings") or by
savings income, *is* set against dividends, so as to work out how much
of he dividends, if any, are taxable in the starting, basic, and higher
rate bands.

To cover the gift aid liability, dividend income would thus need to
exceed the PA by enough for the tax credits on this excess to be
available to be put to this use.

Work it out on (say) only income of dividends received £1980, and Gift
Aid payment of £780.

Well, the gift aid on a £780 donation is £220 and it must be shown that
tax of at least £220 has been paid (or treated as paid using credits),
and if not then any shortfall must be reimbursed to HMRC.

The £1980 net dividends gross up to £2200 but as this is below the PA
the £220 tax credit is wasted and the full £220 needs to be reimbursed.

This is a pretty unlikely example. Most people with sizeable
dividend incomes would tend to have at least some other income
(usually employment earnings up the PA, to get NI treated as paid).
In that case all their dividend income would be taxed, unlike in
your example.

To escape being collared for a GA refund, your hypothetical taxpayer's
gross dividend income would need to exceed the PA of £4895 by £2200,
and thus the net dividend would need to be at least £6386.

.

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