Personal Tax Calc - Example 2

This example adds a dividend income to example 1 ie a salary of £30,000, interest of £1,000 and dividend income of £7,000 ie basic rate tax payer who becomes a higher rate tax payer due to significant dividend income:

Personal tax pyramid 3

We have deliberately made the first two stages of this calculation the same as example one. Please read that example for an explanation of tax due on the salary and interest. To complete the example we need to add a third pyramid for the dividend income.

Firstly, gross up the dividend payment yielding £7,778 (ie £7,000 / 0.9). Add this £7,778 to the dividend income pyramid. Start at the level of the interest income pyramid (ie £31,250). The first £3,750 fits into layer 2 (ie basic rate tax due at 10% on dividends). The remaining £4,028 gets added to layer 3 “high rate tax”. Within this layer, the dividend is taxed at 32.5%. Hence total tax due on this dividend is blended across the basic and higher rate bands. The total due being £1,684.10 ((£3,750 * 10%) + (£4,028 * 32.5%))

The total tax bill for the year is £6,439.10 (ie £4,505 + £250 + £1,684.10). Please note that most of this tax has probably been paid already ie

  • Earned income - £4,505. This was taken as PAYE as it was earned
  • Interest income - £250. This was taken by the bank before the net interest was paid.
  • Dividend income - £1,684. The tax credit has been paid (£778) leaving £906.10 to pay.

Hence I would expect the actual additional payment to be £906.10.

While that is the basis of the system, there are further complexities for low earners and high earners:

  • A low earner who has earned less than the personal tax allowance has pre-paid 20% tax on any interest income. The personal tax calculation then taxes this interest income at 10% (assuming the combined income is less than the personal tax allowance). There is a mechanism by which this overpaid interest income tax can be re-claimed or that future interest income will be paid at gross ie before the tax has been removed. Example 999 gives a more detailed example.
  • Anyone earning more than £100,000 starts to lose the benefit of their personal tax allowance. For every £1 earned over £100,000, they lose 50p of their personal allowance until the benefit of the full personal allowance has been lost. In terms of our model, this changes the tax rate of the first layer of the earned income pyramid and interest income pyramids. The tax rate of this first layer becoming the same as the basic tax rate (for the portion of the benefit lost).