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Where Taxpayers and Advisers Meet
Finance Bill 2016: Dividends, Savings Income, Incorporation and Transferable Allowances
04/01/2016, by Lee Sharpe, Tax Articles - Budgets and Autumn Statements
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TW Ed reviews FB16 for dividends, savings income and the new “allowances”, plus incorporation, and the horror of the Transferable Personal Allowance.


In this article, I have attempted to distil the key points and implications of the opening clauses of Finance Bill 2016 dealing with dividends and savings income. It is entirely possible that I have misunderstood. If that should be the case, then I shall of course endeavour to update / amend if and when appropriate.

Preamble – Or Just Amble

I had for a time to suffer a maths lecturer, who once enthusiastically spent all of my afternoon proving a mathematical construct. Bamboozled but determined not to let maths defeat me so early on, I spent 2 wash cycles poring over 6 pages of equations, time and time again. Eventually, I found myself comparing the initial statement with the lecturer’s giddy conclusion, and realised that the mental effort required to get from beginning to end was in fact modest. It was all the little steps in between that turned an intellectual hop, skip and a jump into a stultifying North Face of the Eiger. I never attended another of the egghead’s lectures. Like many students before and since, I struck gold with Stroud. Stroud got the raw end of the deal.

Introduction Proper

I have sensed a tendency in recent years – and I believe it is accelerating – to “dumb down” tax legislation. Rather than be encapsulated in a few well-written lines, it is stretched beyond simple and ready comprehension to line after line, page after page of dogmatic logical phrases, with a pile of temporary definitions stuffed at the end. It turns what should be a brisk jaunt into a marathon crawl.

Welcome to the world of programming for beginners – or, as I think IT people call them, “noobs”.  Only, as any programmer will tell you, the definitions are generally declared or defined at the outset, otherwise the programme simply won’t understand what you are getting at. In this regard, humans are no different.

It wouldn’t be so bad, if it actually worked.  But often, I think, it does not. As I have previously written, there is a conflict implicit in using tax adjustments (reductions or additions) alongside the reliefs that create them. Outputs and inputs do not readily mix. To put it another way, if the amount of tax is the answer to “how much tax do I owe?”, it of course makes no sense if you need to know the answer before you can correctly frame the question, or the calculation that determines that answer.

The New “Allowances”

I do hope it is not too long before we can stop referring to these adjustments as “allowances”. I believe that there is a general accord as to the meaning of reliefs, allowances and bands when it comes to working out a personal tax liability. Everyone’s lives would have been much easier if the government had correctly categorised these “allowances” in the first place. They might not have tripped so easily off the Chancellor’s tongue but, quite frankly, I couldn’t give a monkey’s. The government works for the people, not the other way around.

The New Dividend Nil Rate Band (Clause 2)

The Explanatory Note (EN) summarises reasonably neatly in the following lines:

“Where an individual receives dividend income that would otherwise be chargeable at the dividend ordinary, upper or additional rate, and the income is less than or equal to £5,000, the dividend nil rate will apply to all of the dividend income. Where the dividend income is above £5,000, the lowest part of the dividend income will be chargeable at 0%, and anything received above £5,000 is taxed at the rate that would apply to that amount if the dividend nil rate did not exist. “

I reckon I could cut that roughly in half*, but it’s not a bad attempt. Unfortunately, the EN is not the legislation. 

The legislation, a new ITA 2007 s13A, is instead much longer. The meat is a page and a half of sub-sections, chock full of interim definitions. At least they are defined as we go along. Programmers (and some real humans) will be relieved.

To my eyes, they ultimately (incrementally) deliver on the Explanatory Note. (The implication at Step 3 that there might be dividend income somehow totalling less than the new dividend nil rate band of £5,000 but nonetheless able to occupy space in the ordinary rate band, and the upper rate band, and the additional rate band all at the same time, did cause those eyes to roll for a while. But there are worse things.)

They also deliberately leave the Transferrable Tax Allowance between Married Couples unaffected. The benefit of the election is not felt even if the recipient still pays no higher/additional rate tax, if he or she is saved only because of the new dividend nil rate band. This approach appears to differ to the new Savings Allowance. See later.

Removal of Dividend Tax Credit (Clause 3)

Understandably, numerous adjustments are required of legislation generally, to give effect to the abolition of the dividend tax credit. I must admit to not having checked the minutiae.

How Now, Incorporation?

Setting aside the loss of Entrepreneurs’ Relief / amortisation of goodwill in a standard OMB-type incorporation, and looking only at ongoing business, the margin is significantly thinned.

I have set out some charts, which aim to illustrate the effects of incorporated –v– unincorporated.

The charts incorporate the latest 2016/17 figures forecast for Personal Allowances / Basic Rate Band per the Autumn Statement. I am surprised how few people seem to have noticed that they have dropped by a few hundred pounds since the previous forecast in the Summer 2015 Budget. No doubt they will change again, come March 2016, when it really matters.

Chart to Compare Net Incomes After Tax for Sole Trader v Shareholder/Director of Own Co 2016/17 with £8k Salary and Balance All Distributed as Dividends

The first chart is moderately successful in showing the difference. The scale does not help. I have therefore included a further chart.

Chart to Compare Difference in Net Incomes After Tax for Sole Trader v Shareholder/Director of Own Co 2016/17 with £8k Salary and Balance All Distributed as Dividends

Note that the scalings are foreshortened to accommodate higher profits. Gradients will not therefore be accurate.

There are several kinks/spikes in the charts, thanks to the new regime.

If we consider the marginal rates of net income in force, it is clear what are the underlying trends:

Net Income YIelds


Dividends net of CT on Profits






Basic / Ordinary Rate


92.5% x 80% = 74.0%


Higher / Upper Rate


67.5% x 80% = 54.0%


Additional Rate(s)


61.9% x 80% = 49.5%






Few will be surprised that incorporation is now distinctly less favourable. What some may not have realised is how badly/quickly it unravels for higher earners.

Generally around the Basic Rate, dividends are marginally better, and the benefit increases because the corporate/dividend route offers a 3% better net yield.

There is a bit of a spike which arises when the self-employed individual goes through the Higher Rate Band, but the director/shareholder still enjoys dividends at only 7.5% because he/she is receiving personal income out of profits which have already suffered 20% Corporation Tax, so the latter gets to personal Higher Rates somewhat later. At this point, the margin is around £2,000 in favour of incorporation. This could easily be lost through the higher costs of running a company.

As profits continue to rise, the benefit soon starts to trend downwards, as the dividend route yield at the Upper Dividend Rate is 4% worse off than the self-employed counterpart.

A further narrow spike in favour of incorporation arises around the £100,000 mark where, again, self-employed profits start to shed Personal Allowances, thereby suffering a much higher effective personal marginal tax rate than the director/shareholder, whose after-CT income is still comfortably below £100,000.

Yet again, however, the margin rapidly tails off as profits continue to rise because, once both are past the £100,000 personal income mark, the net income yield from dividends is once more markedly less than the self-employed counterpart.

While a final kink betrays the delay between self-employed profits hitting the Additional Rate and the director/shareholder achieving same, by then the damage is done and incorporation is at a definite disadvantage.

Incorporation - Conclusion

It would perhaps be an over-simplification to suggest that incorporation remains beneficial, but only provided you can confidently predict your profits will hover indefinitely around the £110,000 - £130,000 mark, (and definitely not much more). The downslope past £140,000 is a veritable black run, deeper and darker than Sauron’s underpants. I suspect that, wherever you are in the country, between now and March you will now and again hear a distinct sonic boom as multiple very high-earners disincorporate faster than the speed of sound.

The New Savings Allowance (Clause 1)

These changes are less inspiring, which is why the clauses are reviewed in this order. The corresponding Explanatory Note starts off well enough with, again, a single paragraph. The legislation itself... four pages.

There is a new ITA 2007 s 12A, which comprises a reasonable start to determine how savings income should be taxed when it encounters the new nil savings rate band.

There is also a game attempt to dress up the quantum of the savings nil rate band as an allowance, in a new s 12B.  But that is perhaps the best thing that could be said of 12B.

12B commits, in my opinion, a number of sins.

It has to define “additional-rate income” and “higher-rate income” purely for itself. It does so, some way after you start thinking you might like to know what the hell they are, if they need now to be defined.

Both those “incomes” are defined by reference to the outcome of the tax calculation. In other words, in order to work out your tax bill, you need to figure out whether your new savings nil-rate band is £1,000, £500 or £nil. And to do that, you effectively need to work out your tax bill. If it seems circular, that’s because it is. Now, it could be argued that it was always going to be thus. I would disagree. But that is not the end.

Let’s quickly touch on the basic principle. You start with £1,000 of savings nil-rate band. It drops to £500 if you have higher-rate income. It drops to nil if you have additional-rate income. Simple. In fact, the legislation approaches it from the opposite direction. It shouldn’t make a difference, except perhaps in interpretation. More on that later.

The new 12B (8) (a) defines “higher-rate income” as

         i.            income on which income tax is charged at the higher rate or dividend upper rate,

       ii.            income on which income tax would be charged at the higher rate but for section 12A (income charged at savings nil rate),

      iii.            income on which income tax would be charged at the dividend upper rate but for section 13A (income charged at dividend nil rate)


Point ii stops you from getting £1,000 if your income would take you into higher rates but for the first £1,000 of savings income under the new regime itself, which seems fair enough.

Point iii likewise stops you from having up to £5,000 of dividend income before nudging into the higher- (strictly, upper-) rate band and still getting the full £1,000 savings nil rate band. Again, fair enough.

The new 12B (b) defines “additional rate income” as

(i) income on which income tax is charged at the additional rate or dividend additional rate,

(ii) income on which income tax would be charged at the dividend additional rate but for section 13A (income charged at dividend nil rate),...

Point ii again stops you from enjoying £500 tax-free interest if you have up to £5,000 of dividend income but are otherwise on the brink.

But this time I cannot find anything explicitly to stop you from sliding up to £500 of savings income (on top of, say, £150k earnings) into the additional rate band by virtue of 12A. I don’t see how it can be required at the higher rate threshold, (and be duly dealt with by the new 12B(8)(a)(iii)), but not be necessary also at the additional rate threshold for similar reasons. I have checked with HMRC twice that they intend for there to be no such “leakage”.

It might perhaps be inferred from the structuring of 12B (2)/(3)/(4), which together act to give value to the savings nil rate band only once the income falls below certain thresholds (i.e., opposite to the way one might ordinarily approach it) but I conclude that this uncertainty derives from the chicken-v-egg conundrum you get when, basically, you use something as a component it its own definition. (And if so, why the need for 12B(8)(a)(iii), for higher rate earnings?) To be fair, I have the same problem when I try to define a trust without including the word “trust”. I know it’s possible. I have even read good definitions that manage it. But I just cannot do it. Is “entrust” cheating? I suspect so.

Transferable Tax Allowance for Married Couples

With regard to the new savings nil rate band, the new ITA 07 s 12B(8) ensures that income falling within the new savings nil rate band does not prevent either the election, or the recipient’s benefit therefrom, being effective.

This differs to the approach for the new dividend nil rate band, as I mentioned above. It is not so much the dividend nil rate which is the problem. It is the new ITA 07 s13A ss (5) and (6): each requires that the individual’s income would not fall into upper/additional dividend rates, if there were no dividend nil rate at all. (5) applies for the beneficiary of the election; (6) for the individual making the election. In effect, the dividend nil rate band is fine, so long as it is not.

For government to split its approach in this way is difficult to fathom. Perhaps it is because the savings nil rate band is only £1,000, while the dividend nil rate band is £5,000.

Whatever the logic behind the government’s drafting, the consequences for anyone actually trying to undertake a manual tax calculation are dreadful.  


Let’s assume my darling wife asks me about this new-fangled Transferable Personal Allowance between Married Couples, that she’s heard about on one of her brunches**.

Taking it from the top, in order to see if I can or should elect to transfer some Personal Allowance to my spouse in 2016/17, I have to:

  1. Run a calculation to check whether or not I would owe any higher/upper rate tax or worse, if the election were made. I cannot use a standard model because I have to pretend in this instance that the dividend nil rate band does not exist. But nor can I use a simple gross income calculation, because I now have to allow for the nil rate savings allowance, which does exist in this temporary hypothetical alternative world, but – and this is important from a programming perspective – as one of three possible values. I have to do the calculation before I know which value.
  2. I can then calculate my own tax, as normal. When I say “as normal”, what I mean is that I have to calculate my own tax once at least so far as to work out whether or not I am entitled to all, some or no savings nil rate band, and then calculate my tax again, this time for real.
  3. My spouse has then to calculate her tax, most of the way “for real” – i.e., once more having to calculate her tax once to work out whether or not she is entitled to all, some or no savings nil rate band, and then again, presumably with malice aforethought. Or after thought.
  4. But, just before finishing off her tax calculation, my long-suffering spouse then has to take a detour through yet another hypothetical world to any journeyed to thus far, to work out if she would still have been able to claim that same tax reduction I elected to transfer to her if she’d run her same tax calculation but this time without a dividend nil rate band and then, once back in the room, carry on with her original “for real” tax calculation.

So, between us, we effectively have to run our individual tax calculations six times, each slightly different, in order to work out whether or not we should transfer Personal Allowances.

Just for fun, I might add that the legislation at ITA 07 s 55A-E permits a transfer of Allowances in either direction and, theoretically at least, in both simultaneously. (I have queried this second point with HMRC twice and they concurred – although on both occasions, they clearly thought the notion preposterous. They have no imagination.) The whole thing becomes less fun when you realise that such flexibility means a couple might have to run roughly a dozen slightly different calculations (I expect redundancies in calculation) in order to divine whether or not it’s worth making an election worth about £200.

Digital Drive to Distraction?

I conclude that this is why we are now rushing headlong towards a digital revolution in tax. It is not because it will make our lives easier. It is because the government has realised it will no longer be able to spin out the mantra “tax doesn’t have to be taxing” if the guidance on a flagship allowance works out to the taxation equivalent to War and Peace. I cannot wait to see the 2016/17 tax calculation worksheet.

One might think this a programmer’s paradise: only they can prevail. I suspect it is people with a foot in both tax and programming camps who got us here. The clue is in the practically machine code now pervading our legislation. I think instead that software houses are probably trying to work out how on Earth they are going to be able to shoe-horn the necessary changes into the next 3 months before 2016/17 goes live. I suspect they are also grinding their teeth over the ridiculous overhead now required, for what should be a fairly basic calculation. Me, I am stocking up on pencils and erasers. Unlike a PC programme, you and I can spot, discard and re-fashion calculations on the fly. Just don't lose your calculator.

Happy New Year,




*”To the extent that dividend income would be chargeable to the dividend ordinary, upper or additional rates but for this section, an amount of that income up to but not exceeding the new dividend nil rate band will instead be chargeable at the nil rate of tax”.  No?

**She would do no such thing. As a busy working mother, she would instead ask the more obvious and significantly more difficult question of why she pays so much tax if I am supposed to be some kind of expert (which is of course similar to what clients ask their advisers all the time). The TPA is one of a myriad of things which would flash before my eyes, including, but not limited to:

  • A lightning-fast synopsis of a life not quite yet fully lived
  • A full and frank confession that I am in fact an impostor
  • A monastery
  • The age-old question: is a dog-house more than just a kennel and, if so, is it allowed to have wi-fi and still be a dog-house?
  • A nest of vipers
  • What would Chuck Norris do? (Link)

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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