Personal allowance / dividends / additional income

[Nsandy20]

I'm wondering if someone can answer my questions so I can estimate my tax bills when the salary is constantly changing. I don't want to be surprised with tax returns each year and ensure we are saving the correct amount each month to prepare!

My husband's salary is £114,000. For 20/21 tax year his tax code has been adjusted to reduce the personal allowance so he will have £5,500 tax free allowance so all tax will be correct based on that basic salary.

We then earn additional income from our property which is declared on his tax return (renting out barn space for storage). We get paid £523 per month = £6276 per year. So I believe this means additional tax free allowance will be removed (every £2 = £1 less PA) = £3138 less PA. so now he has a personal allowance of £2362.

I want to know what the tax money will be in the January on the tax return. As the tax code has been adjusted he will only need to pay tax on any additional personal allowance loss and the extra income. How do I go about working this out?

What I would like to know if how much of the additional income from our property is PROFIT and what is tax money to be saved for the tax return. I want to know if it is worth it for us as it is making his personal allowance less.

Further to this, he then receives dividends (these are not always guaranteed and amounts differ). I know if he gets a dividend this will wipe out the rest of his personal allowance plus 32.5% dividend tax. if he earnings go over £150k the dividend tax is 38% - is this for earnings over £150k or ANY dividend paid in that tax year if earnings go over £150k?

thanks,

[Lambs]

N,

Based on the information you have provided his Self Assessment liability will be based on:


Further forfeiture of Personal Allowance

Tax on rental profit on barn, net of any costs incurred to let it out (such as heat / light, repairs, insurance, and an appropriate element of mortgage costs if applicable)

Tax on dividend income


The first £2,000 of dividend income is always tax-free. The surplus in this scenario will be taxable at 32.5% and then at 38.1% but only if, and to the extent that, his income exceeds £150,000.


But note that it is POSSIBLE that, if his dividend income is substantial, he will also be required to make a payment on account for the next tax year. It would appear unlikely because he will pay a lot of tax already through PAYE but not impossible.

If he makes significant pension contributions then his Annual Allowance MAY be restricted if his total income is high enough. Pension contributions affect his tax position anyway, and I note you made no reference to them in your post.

Depending on YOUR income levels, you should consider whether or not it is tax-efficient to transfer the barn into joint names or even solely into your name. As a presumably married couple / civil partnership there should be no Capital Gains Tax cost, and Stamp Duty Land Tax (or its devolved equivalent, presumably) will be payable (if it is transferred as a gift) only if that property is subject to a mortgage.

It may be appropriate to consider a similar approach in relation to his shares (but if they are shares in a small company, as averse to shares on a stock exchange, then he may need to seek the permission of his fellow shareholders beforehand).

I would recommend that you speak to a qualified adviser about the last couple of points before doing anything, since there will be IHT implications and it would be unwise to consider the current year Income Tax aspects in isolation.

With regards,

Lambs

[Nsandy20]

N,

Based on the information you have provided his Self Assessment liability will be based on:


Further forfeiture of Personal Allowance

Tax on rental profit on barn, net of any costs incurred to let it out (such as heat / light, repairs, insurance, and an appropriate element of mortgage costs if applicable)

Tax on dividend income


The first £2,000 of dividend income is always tax-free. The surplus in this scenario will be taxable at 32.5% and then at 38.1% but only if, and to the extent that, his income exceeds £150,000.


But note that it is POSSIBLE that, if his dividend income is substantial, he will also be required to make a payment on account for the next tax year. It would appear unlikely because he will pay a lot of tax already through PAYE but not impossible.

If he makes significant pension contributions then his Annual Allowance MAY be restricted if his total income is high enough. Pension contributions affect his tax position anyway, and I note you made no reference to them in your post.

Depending on YOUR income levels, you should consider whether or not it is tax-efficient to transfer the barn into joint names or even solely into your name. As a presumably married couple / civil partnership there should be no Capital Gains Tax cost, and Stamp Duty Land Tax (or its devolved equivalent, presumably) will be payable (if it is transferred as a gift) only if that property is subject to a mortgage.

It may be appropriate to consider a similar approach in relation to his shares (but if they are shares in a small company, as averse to shares on a stock exchange, then he may need to seek the permission of his fellow shareholders beforehand).

I would recommend that you speak to a qualified adviser about the last couple of points before doing anything, since there will be IHT implications and it would be unwise to consider the current year Income Tax aspects in isolation.

With regards,

Lambs

Thanks for your reply.

This January just gone has been the first self assessment he has done and we are due to pay another £5k in July in advance for 20/21 tax year.

Forgetting dividends, I was just wanting to know our monthly income, what additional money is tax so I can save it monthly.

For the previous year I was just saving 40% of the barn payments for tax but we were not aware of the personal allowance decreasing over a certain salary! Therefore my calculations for tax were all wrong and we were greeted with thousands of pounds extra tax!

[D&C]

This January just gone has been the first self assessment he has done and we are due to pay another £5k in July in advance for 20/21 tax year.

You have got your tax years mixed up. No one has to make "advance" payments.

He may have to make a second POA for 2019/20 in July 2020 (nearly 4 months after the end of that tax year) but the earliest anything would be payable for 2020/21 is 31 January 2021, three quarters of the way through that tax year.

[Lambs]

D is of course correct but it is any easy mistake for a novice Self-Assessing taxpayer to make. If he is already making payments on account this suggests that he may have had pretty substantial dividends in the 2018/19 tax year because generally, where most of your income is taxed through PAYE, you are "protected" from having to make such interim payments unless the additional tax due on non-PAYE sources is substantial. But looking at the figure for the payment that you mentioned, that may well be the case.

The effective tax rate when adjusted income is only a little above £100k is very high. Which is why I raised the option of transferring some or all of the income-producing assets to you - subject to checking with a suitably qualified adviser, of course.

Regards,

Lambs

[Nsandy20]

This January just gone has been the first self assessment he has done and we are due to pay another £5k in July in advance for 20/21 tax year.

You have got your tax years mixed up. No one has to make "advance" payments.

He may have to make a second POA for 2019/20 in July 2020 (nearly 4 months after the end of that tax year) but the earliest anything would be payable for 2020/21 is 31 January 2021, three quarters of the way through that tax year.

Yes sorry you are correct I got my dates wrong. The July payment is for tax year 19/20

[Nsandy20]

D is of course correct but it is any easy mistake for a novice Self-Assessing taxpayer to make. If he is already making payments on account this suggests that he may have had pretty substantial dividends in the 2018/19 tax year because generally, where most of your income is taxed through PAYE, you are "protected" from having to make such interim payments unless the additional tax due on non-PAYE sources is substantial. But looking at the figure for the payment that you mentioned, that may well be the case.

The effective tax rate when adjusted income is only a little above £100k is very high. Which is why I raised the option of transferring some or all of the income-producing assets to you - subject to checking with a suitably qualified adviser, of course.

Regards,

Lambs

His salary started in January 2018 and remained on the normal tax code of 1250L which included the tax free personal allowance. Obviously when we have done the first year self assessment in January 2020 for 18/19 tax year the hmrc have now changed his tax code to lessen his personal allowance (it looks like they had just reduced it based on his salary - not additional income and dividends. The tax year 18/19 we did the self assessment on he received £10,000 dividends.

I think this year self assessment was high due to his PAYE tax code being the normal one and therefore we had to pay tax on his salary (the reduced tax free allowance) and then the barn payments and dividends. From April 18 I was saving 40% of the barn payment money and I was saving 32% dividend money. The tax bill came to much higher than the money I had saved due to the additional tax on his salary we were not aware of.

Now his PAYE salary has been adjusted we should just be paying tax on the barn payments and the dividends.. but it’s not as simple as just a set percentage of those payments as this extra income reduced his tax free personal allowance.. so I just really want to know how to work out for every barn payment we get what is the taxable amount!

We cannot transfer the barn into my name as suggested.

[Lambs]

N,

This is impossible to answer until we know the extent of his dividend income, and you have addressed the point about whether the £523/month for the barn is pure profit or gross income from which further rental costs might be deducted. If the latter then you will need to give us a figure either for those additional expenses, or what you think the net rental profit might be.

I did not design our tax regime.

Regards,

Lambs

[Nsandy20]

Thanks.

We do not charge for any running costs or anything like that we declare £523 are pure profit.

Dividends change quite a bit.
18/19 - £10k
19/20 - £35k
20/21 we are estimating £0 due to current Covid situation.

In my head I just planned when he received a dividend to save more than required for tax to cover the reduced personal allowance and this is additional money for us and not monthly income. The barn payments we use in our daily life so I didn’t want to be over spending money that is for tax and want to work out if it’s benefiting us renting out the storage.

Does this extra information help? I’m just wondering if you can give me the calculations to work out what is tax money as explained before I just did 40% but that’s not correct as this doesn’t take into consideration the reduction in personal allowance.

Thanks

[Lambs]

For 2019/20:

Assuming -

Salary of £114k, tax deducted to cover only salary through PAYE = £35,900

Rental income of £6,276, with no expenses such as mortgage interest to set against it

Dividend income of £35k

He will be an Additional Rate taxpayer as he will go a little above £150k in total income.

The additional tax liability for the year on that extra £41,276 will be £15,730.

This will be:

£6,276 @ 40% = £2,510

£27,724 @ 32.5% = £9,010

£5,276 @ 38.1% = £2,010

Plus forfeiture of £5,500 PA = £2,200

Total = £15,730

For 2020/21:

Assumptions as above but with no dividend income:

Additional tax due will be £3,765

Tax on rental income = £2,510

Further loss of £3,138 PA = £1,255

Total = £3,765

This may of course change if income changes as a result of Coronavirus (or indeed anything else) and of course if further measures to combat the financial consequences of Coronavirus change the underlying calculations.

But based on the foregoing, you will have a sizable further liability for 2019/20 but you should apply to reduce your 2020/21 interim payments (31 January 2021 / 31 July 2021) to about £2k each, to cover a much lower anticipated liability for 2020/21, in the absence of any dividend income for that year.

Regards,

Lambs