Question
As I understand it dividends are 'top sliced' on one's income, ie the 10% rate only applies if the total taxable income falls below the higher rate threshold of just under £35K. If in a particular year capital gains tax is chargeable does this mean that the dividends are assessed after the CGT or is CGT not considered income (though it is taxed as such under the 'simplified' system)? Thanks againAnswer
The 10% dividend tax rate for basic rate taxpayers is cancelled out by the attached 10% tax credit, so basic rate taxpayers have no further tax to pay. The logic behind this is that companies pay corporation tax on the profits from which dividends are paid, so applying basic rate to dividends would effectively result in double taxation (it's a shame HMRC doesn't apply this concept to things like inheritance tax!).
Higher rate taxpayers pay extra tax at a rate of 32.5% on the gross dividend (i.e. with the tax credit applied), which works out an extra 25% tax on the dividend received.
The illustrate the maths:
Suppose you receive a 90p dividend. The 'gross' dividend is 100p leaving basic rate taxpayers with a 10p liability (10% of 100p), which is cancelled out by the 10% tax credit, so no tax to pay. A higher rate taxpayer owes 32.5p less the 10p tax credit, leaving a 22.5p tax bill, equal to 25% of the 90p dividend received.
If you have capital gains, they are notionally added to your income for the purpose of assessing the rate(s) at which the gains will be taxed, but it won't affect the tax position of your income.
As I understand it dividends are 'top sliced' on one's income, ie the 10% rate only applies if the total taxable income falls below the higher rate threshold of just under £35K. If in a particular year capital gains tax is chargeable does this mean that the dividends are assessed after the CGT or is CGT not considered income (though it is taxed as such under the 'simplified' system)? Thanks againAnswer
The 10% dividend tax rate for basic rate taxpayers is cancelled out by the attached 10% tax credit, so basic rate taxpayers have no further tax to pay. The logic behind this is that companies pay corporation tax on the profits from which dividends are paid, so applying basic rate to dividends would effectively result in double taxation (it's a shame HMRC doesn't apply this concept to things like inheritance tax!).
Higher rate taxpayers pay extra tax at a rate of 32.5% on the gross dividend (i.e. with the tax credit applied), which works out an extra 25% tax on the dividend received.
The illustrate the maths:
Suppose you receive a 90p dividend. The 'gross' dividend is 100p leaving basic rate taxpayers with a 10p liability (10% of 100p), which is cancelled out by the 10% tax credit, so no tax to pay. A higher rate taxpayer owes 32.5p less the 10p tax credit, leaving a 22.5p tax bill, equal to 25% of the 90p dividend received.
If you have capital gains, they are notionally added to your income for the purpose of assessing the rate(s) at which the gains will be taxed, but it won't affect the tax position of your income.
Read this Q and A at http://www.candidmoney.com/questions/question754.aspx
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