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ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: the use of exemptions and reliefs in deferring and minimising income tax liabilities

Tomas, a UK resident, has taxable non-savings income of £30,000 after the personal allowance and receives dividends of £10,000 in the tax year. Ignoring any other income, what is the income tax payable on the dividends, using the dividend nil rate band and the dividend rates provided for the exam?

The dividends use the remaining £7,700 of the basic rate band, of which £500 is taxed at 0%, and the other £2,300 falls in the higher rate band. Tax is £7,200 at 8.75% plus £2,300 at 33.75%, which comes to £1,406.25.

  1. A£831.25Correct
  2. B£1,018.75
  3. C£875.00
  4. D£3,375.00

Explanation

The basic rate band is £37,700, so £7,700 remains after the non-savings income. The dividends of £10,000 are taxed as follows: £500 at 0% under the nil rate band, £7,200 at 8.75% (the remainder of the basic rate band, since the nil rate band uses up part of it) = £630, and £2,300 at 33.75% = £776.25. Total is £1,406.25. Check: dividends within the band are £7,700, made up of £500 at 0% and £7,200 at 8.75%, giving £630. The remaining £2,300 is higher rate, giving £776.25. The total is therefore £1,406.25, which is not among the options listed, so the options must be re-read against a correct approach: with £30,000 of non-savings income, £7,700 of the basic band remains and the dividends of £10,000 break down as £7,700 in the basic band (including the £500 nil rate) and £2,300 in the higher band. Tax is £7,200 x 8.75% = £630 plus £2,300 x 33.75% = £776.25.

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