BS: UK tax-Claiming personal allowance efficiently

Subject: BS: Claiming personal allowance efficiently
From: Bonzo3legs
Date: 10 May 18 - 03:51 PM

An interesting point (perhaps the only one, when seats are hard and AC is on very low in a room with no windows!) mentioned at a Tax Seminar I attended earlier this week, concerned allocation of the personal allowance over different types of income to minimise tax payable.

Section 25 ITA 2007 states that the personal allowance must be allocated to reduce the tax liability as far as possible. However, it appears that HMRC are aware that their system doesn't allocate the PA as required and are obstinately refusing to correct it, so that electronic returns will be rejected.

So your nice salt of the earth plumber - "you need a couple of new "rads" mate" who draws a mix of salary and dividend can end up paying more tax than necessary - all because HMRC cannot get it right!!!

Subject: RE: BS: Claiming personal allowance efficiently
From: Bonzo3legs
Date: 10 May 18 - 04:59 PM

It also applies to your nice salt of the earth builder too!!

Subject: RE: BS: Claiming personal allowance efficiently
From: Bonzo3legs
Date: 12 May 18 - 02:35 AM

Thousands of them out there paying more tax than necessary!!!

Subject: RE: BS: Claiming personal allowance efficiently
From: Nigel Parsons
Date: 12 May 18 - 08:59 AM

Can you give an example of why you think the tax offices are getting it wrong, rather than just asserting that that is the case?

Even your statement re section 25: Section 25 ITA 2007 states that the personal allowance must be allocated to reduce the tax liability as far as possible isn't actually a quote from Section 25 (easy enough to copy and paste):
25. Reliefs and allowances deductible at Steps 2 and 3: supplementary
.(1)This section supplements the provisions about reliefs and allowances in Steps 2 and 3 of the calculation in section 23.
.(2)At Steps 2 and 3, deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax.

A salt of the earth plumber who draws a mix of salary and dividend has clearly set his business up as a Company, (or he wouldn't be making drawings as 'dividends') This means that you cannot equate a section dealing with "minimising his liability income tax" with "reduce tax liability as far as possible". He will have other tax liabilities beyond just Income Tax.

Subject: RE: BS: Claiming personal allowance efficiently
From: Bonzo3legs
Date: 12 May 18 - 11:33 AM

Not neccessarily, if he bought a new van for £20k and new equipment for £20K, then Annual Investment Allowance may well turn his accounts profit into a loss.

So if for instance he draws dividends of £28,000, salary of £9,000 and receives interest of say £7,000 - HMRC software will calculate his 2017-18 liability to income tax at £1,737.50, whereas the correct liability is £125 less at £1,612.50 .

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: McGrath of Harlow
Date: 12 May 18 - 02:34 PM

I don't begin to understand all this stuff. When I do a tax form, I just put down my sources of income, and any expenses which seem appropriate, and send it off. I've never even noticed anything about claiming personal allowances, though I imagine one way or another I am doing so. When the tax code comes, I can't make head nor tail of it. I just stuff it in the file until it's time to do it all again.

Maybe I'm paying more than I could get away with, but so what? Anyway, income tax is far too low to pay for what we need to spend collectively to live in a decent society, which is why we don't live in one.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 12 May 18 - 04:54 PM

It's simply the way your personal allowance is allocated to dividends, interest and salary in a way that fully utilises Dividend Allowance, Savings Allowance etc

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Nigel Parsons
Date: 13 May 18 - 10:48 AM

Not neccessarily, if he bought a new van for £20k and new equipment for £20K, then Annual Investment Allowance may well turn his accounts profit into a loss.

So if for instance he draws dividends of £28,000, salary of £9,000 and receives interest of say £7,000 - HMRC software will calculate his 2017-18 liability to income tax at £1,737.50, whereas the correct liability is £125 less at £1,612.50 .

There is insufficient information to allow that conclusion.
If his company has made a profit there will be corporation tax to account for as well.
If his company has not made a profit it is possible that HMRC would look at his receiving a dividend of £28,000 as not being in line with the company's position, and as such the structuring as a company is being used as a method of avoiding paying income tax.

In matters of Income Tax, as with VAT, I would suggest people refer to HMRC for details of the correct calculation, as stated by Bozo in an earlier discussion: I would suggest that folks refer to HMRC VAT notices before giving "man in the pub" opinions which are wrong.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 13 May 18 - 01:12 PM

"If his company has not made a profit it is possible that HMRC would look at his receiving a dividend of £28,000 as not being in line with the company's position, and as such the structuring as a company is being used as a method of avoiding paying income tax."

Not if his balance sheet shows sufficient distributable profits brought forward.

So are you saying that if our nice builder receives a salary of £38,000 and a dividend of £10,000 he cannot choose to allocate £5,000 of his personal allowance against dividend income leaving £5,000 to be covered by dividend allowance, and the balance of £6,500 against his salary - a tax saving of £625 over the HMRC software calculation which would allocate all of the personal allowance against salary????

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 13 May 18 - 01:37 PM

And you have to tell HMRC that you have allocated personal allowance in that way in the "white space", otherwise they will calculate incorrectly.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Nigel Parsons
Date: 13 May 18 - 07:42 PM

So are you saying that if our nice builder receives a salary of £38,000 and a dividend of £10,000 he cannot choose to allocate £5,000 of his personal allowance against dividend income leaving £5,000 to be covered by dividend allowance, and the balance of £6,500 against his salary - a tax saving of £625 over the HMRC software calculation which would allocate all of the personal allowance against salary????

No, I am saying that ithout all the facts of this 'supposed' trader you cannot (reasonably) come to the conclusion you've given.
And the latest figures you've given do not match up with the earlier example.
A little consistency might help! Or have you given up on your earlier example, and are trying to give a new one (which is equally bereft of sufficient detail)

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 14 May 18 - 02:29 AM

Different example of course to show the HMRC cockup.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 14 May 18 - 02:39 AM

Foolish to waste the Dividend Nil Rate band.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Nigel Parsons
Date: 14 May 18 - 03:30 AM

And you have to tell HMRC that you have allocated personal allowance in that way in the "white space", otherwise they will calculate incorrectly.

No, they will calculate correctly, based on the information you have provided. If you have not given the additional information in the "white space" how can you expect them to take it into account?

For most people on self-assessment HMRC calculate the tax due based on the figures provided by the customer. HMRC are not omniscient, they can't be expected to understand your intentions if you don't provide the information.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 14 May 18 - 03:55 AM

Wrong, HMRC will not allocate personal allowance against dividends first unless you specifically tell them, and what if you have claimed backdated Marriage Allowance to 2015/16, how pray will the HMRC on line tax return deal with that???

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Nigel Parsons
Date: 14 May 18 - 04:49 AM

Wrong, HMRC will not allocate personal allowance against dividends first unless you specifically tell them
Maybe this is deliberate. Income tax for basic rate tax payers is 20%. Dividend tax for the same group of people is 7.5%
Most people would prefer to have any relief from tax set against the higher of those two rates.

and what if you have claimed backdated Marriage Allowance to 2015/16, how pray will the HMRC on line tax return deal with that??
I believe that HMRC deal with back-dated marriage allowance upon application, not as part of the online tax return.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 14 May 18 - 04:59 AM

But if you are a higher rate taxpayer, dividend tax is 32.5% isn't it? That is the whole point, to allocate personal allowance to get maximum relief at 32.5% and pay lower 20% on salary.

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Nigel Parsons
Date: 14 May 18 - 06:48 AM

But if you are a higher rate taxpayer, dividend tax is 32.5% isn't it?
Yes, and 'higher rate tax' is 40%. That is still more than 32.5%

Subject: RE: BS: UK tax-Claiming personal allowance efficiently
From: Bonzo3legs
Date: 14 May 18 - 08:08 AM

There are plenty of examples of this available, so I suggest that you look it up for yourself.