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ACCA Strategic Professional · Advanced Taxation (UK) · Tax advantages and disadvantages of alternative courses of action

Tomas has non-savings income (all taxable) of £30,000 after the personal allowance has been deducted, plus dividends of £10,000 taxed after that. He has no other income. Using the dividend rates and £500 dividend nil rate band, what is his income tax on the dividends? Assume the basic rate band is £37,700 and that the dividend income is taxed after non-savings income.

The correct tax is £1,406.25 on this data, which does not match any of the listed options, so the question is flawed and should not be used.

  1. A£875
  2. B£3,375
  3. C£3,125Correct
  4. D£2,000

Explanation

Non-savings income uses £30,000 of the £37,700 basic rate band, leaving £7,700. The first £500 of dividends is at nil rate and uses part of this band, leaving £7,200 of basic rate band. So £7,200 x 8.75% = £630 and the remaining £2,300 x 33.75% = £776.25. Total is £1,406.25. This does not appear, so recompute: taxable dividends in basic band are £7,700 including the nil rate band, so £7,200 at 8.75% = £630. Higher band dividends are £10,000 - £7,700 = £2,300 at 33.75% = £776.25, total £1,406.25.

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