Dividend tax calculation error in online SA?

Hello, I'm trying to complete my 2023/4 return online. I have some dividend income above the £1,000 allowance (£544). In the "view your calculation" section, the dividends do not seem to be taxed at the dividend rates. Instead, under "Pay, pensions, profit etc.", the amount given equals the total of these items minus my personal allowance plus my dividend income (less the £1,000 allowance), all taxed at 20%. There is no separate dividend tax component. This seems similar to this issue from 6 months ago, which didn't look to have a resolution: https://community.hmrc.gov.uk/customerforums/sa/4c899329-ee82-ee11-a81c-6045bd0e4841 A way to get the same result as the online calculation is to first set £544 of the personal allowance against the dividends rather than salary - that way, the part of the personal allowance subtracted from salary is £544 less than it should be and the amount under "Pay, pensions, profit etc." is £544 more. This results in the tax due being higher than if the whole of the personal allowance is set against salary and the dividends are taxed at the basic rate, however. So could this be a mistake in how the online calculation is working? Note, I have recorded charitable donations that increase my basic rate limit to be just above my taxable income (including the dividends after subtracting the £1,000 allowance) and it seems possible that being close to the limit affects the tool's calculations somehow - just thought I'd mention it in case this can only be replicated in quite specific circumstances. Is there a way to supply our own calculation if the online self-assessment seems to be overestimating the tax due?

Hi PeterRabbit,
This may be down to the the beneficial ordering of your income as your other income is not fully utilising the personal allowances and/or other rate bands.
Thank you. 

Thanks for the response. My other income does exceed my personal allowance. Even if it didn't, it still shouldn't result in marginal tax on dividends of 20%, should it?

Hi,

It depends on the other income reported as this may still be the most beneficial tax deduction.

You should submit the return and allow 72 hours to then contact our Self Assessment team direct to review it.

Self Assessment: general enquiries

Thank you.

NOT HMRC...tax accountant...Note you advise re "charitable donations" claimed...if insufficient taxable income remains after Personal Allowance this will throw all income liable at 20% to reclaim the basic rate credit on gift aid, sounds like this could be your issue?...but note, the HMRC calculation will be correct in that circumstance, you need the taxable income to cover it, otherwise the dividend rate doesent even become a factor.

Pear to Pear .

Thanks for the responses. HMRC Admin - if I understand correctly, it would only be beneficial for the personal allowance to be set against dividend income if there were no other income subject to a higher tax rate. But I have salary above my personal allowance, and the marginal tax rate on that is always higher than for dividend income, so it should always be beneficial to set the personal allowance against the salary and have dividends be taxed at the dividend rates. Can you give an example of tax return numbers where salary exceeds the personal allowance, but it would be beneficial to set the personal allowance against dividends rather than salary, or another way in which dividends apparently get included under "Pay, pensions, profit etc." in the most beneficial arrangement? I'd like to get the correct numbers confirmed before submitting the return, which seems to me like confirming acceptance of the calculation given. I have tried getting through to the self assessment advisors, but with no success so far. Clive - nice thought but I'm paying plenty of income tax above what is due for Gift Aid.

Hi PeterRabbit,
Statistics is not something that can be provided on this forum.
You can submit the return and then contact us to go through the calculation.
If it then shows that an amendment is required, this can be discussed. 
Thank you. 

I didn't ask for statistics. I asked for an example to show how what I'm seeing could be correct.

Hi PeterRabbit,
Sorry we do not have an example to give you.
To see this yourself view your calculation both with and without the dividend income.
Thank you.

I eventually got put in touch with an HMRC advisor who was very helpful. They said that the online calculation was correct, and I thought I'd share the explanation in case other people are puzzled by this, as it's not clear from available online information (unless you want to trek through actual tax legislation apparently). The key points seem to be that: 1. Savings and dividends are treated as the highest part of total income, with dividends considered the higher part, meaning I think that the personal allowance and basic rate bands are used against other income first. 2. The savings and dividends falling into the nil rate allowance bands still contribute to allocating income to basic/higher rate bands. So initially my "Pay, pensions, profit etc.", plus savings income and the first part of my dividend income filled up the personal allowance and basic rate band, then my £544 of dividends above the dividend allowance were in the higher rate band. Then beneficial ordering was applied, so the £544 was set against the personal allowance, displacing £544 of other income into the basic rate band, and £544 of savings and dividend income into the higher rate band - but since these were covered by the nil rate bands, nothing was taxed at the higher rate. So the net effect of the dividends was to have £544 taxed at the basic income tax rate of 20%. (It seems that I would pay less tax if my personal allowance were set against my other income and the £544 of dividends were put in the basic rate band, but I guess beneficial ordering is not supposed to work that way.)

I find myself in a similar situation, albeit more straightforward, as there are only salary and dividends to consider. If I understand you correctly, what HMRC are saying is that dividends (which would be taxed at 8.75%) use up personal allowance first, and then salary (which would be taxed at 20%) uses up anything left. As a result, any incremental dividends would be taxed at 20%. This is undesirable but understandable, but contradicts the example given on gov.uk (tax-on-dividends) which clearly shows the personal allowance being taken off the wages figure. So (if I have understood your explanation) who is correct? HMRC or gov.uk?

Hi Stroller,
If you have allowances available, the system will always calculate the tax in the most beneficial way for you.
Thank you.

Hi Stroller - I thought that for my situation it was because my dividends were poking into the higher rate tax bracket (when those in the nil rate band were included). I agree the example on the gov.uk page indicates that if everything is in the basic rate bracket, the dividends above the nil rate band should be taxed at the dividend basic rate - there's no benefit to setting the personal allowance against dividends in that case that I can see. But I feel I barely understand this!

I have struggled with this for the last few years. I really can't get my head around it, and can find absolutely nothing online that explains it. My situation is similar to PeterRabbit and had exactly the same thought - Dividends are being taxed at 20% not 8.75%. Lasst year I put a number of different scenarios into my Self Assessment form and compared with my own calculations and HMRC tax owed always cam out less, but only by a few £'s. So there is clearly something going on with the use of allowances in a beneficial manner, but I simply can not fathom it - and it is really, really annoying! If anyone can explain it, especially with an example, I would be extremly grateful.

Hi ,
 

You're correct - your dividend income should not be taxed at 20%. Contact us by webchat or phone via : Self Assessment: general enquiries - we can review your calculation, and confirm any amendments that may be necessary . Thank you .