Retired - dividends and capital gains tax question.

[wong]

I'm thinking of retiring soon and live off dividends and capital gains.
As I understand it, as of April 2023 :-

Income band rates
Basic £12571-50270 = 20%
Higher rate £50271 - 125140 = 40%
Additional rate - over £125140 = 45%

Dividends - £1000 allowance, then
Basic rate - 8.75%
Higher rate - 33.75%
Additional rate - 39.35%

Capital gains - £6000 allowance, then
Basic rate at 10%
Above Basic rate at 20%.

Do they count dividend income first or capital gains?

Say, If I'm expecting 60K in dividends that tax year, will I be better off financially, if I sell half (or more) of the shares just before the dividend cut off date and buy back later (avoiding bed and breakfasting rules - 1 month I think?) assuming that the shares only drop by the dividend payout amount for this hypothetical situation.

[wong]

Writing it out helps me think about it.

All dividends - 60K = 50270 at Basic tax rate band and 9730 at Higher rates
- minus personal allowance of 12570
- minus dividend allowance of 1000
50270-12570-1000 = 36700 to be taxed at 8.75% (=£3211.25)
and 9730 at 33.75% (=£3283.875)
Total Tax = 3211.25 + 3283.875 = £6495.125

All capital gains - 60K = 50270 at Basic tax rate band and 9730 at Higher rates
- minus personal allowance of 12570
- minus Capital gains allowance of 6000
50270 - 12570 - 6000 = 31700 to be taxed at 10% (=£3170)
and 9730 at 20% (=£1946)
Total tax = 3170 + 1964 = £5116

What if its 30K in dividends and 30K in capital gains?

[Llandudno]

Take £13,570 as divi for nil tax and no use of BR band, and Cap gain of £46,430.
Your full BR band of £37,700 is available against CGT at 10% then.

CGT would be

£37,700 @ 10%
plus
(£46,430 - £6000 - £37,700) @ 20%

[wong]

Llandudno said:

Take £13,570 as divi for nil tax and no use of BR band, and Cap gain of £46,430.
Your full BR band of £37,700 is available against CGT at 10% then.

CGT would be

£37,700 @ 10%
plus
(£46,430 - £6000 - £37,700) @ 20%

OK. That makes sense. From the 60K, take ~ 13570 as dividends and 46430 as capital gains.
If its more than 60K that year, still take ~ 13570 as dividends and the rest as capital gains.
If its less than ~ 50K ( the basic tax rate £50270) then dividends would give a slightly lower rate.

[Panamax]

wong said:

Income band rates
Basic £12,571-50,270 = 20%
Higher rate £50,271 - 100,000 = 40%
100,000 - 125,000 = 60% (because personal allowance is withdrawn)
Additional rate - over £125,140 = 45%

wong said:

Do they count dividend income first or capital gains?

Income first, then gains.

wong said:

Say, If I'm expecting 60K in dividends that tax year, will I be better off financially, if I sell half (or more) of the shares just before the dividend cut off date and buy back later

I wouldn't faff about with that. Keep your "income" under £99,999 and top up with gains for best efficiency.

No doubt you'll be deploying your tax free ISA to help ensure tax efficiency.

[wong]

Cheers Panamax.
I didn't realise the personal allowance is withdrawn above 100K.
I have no actual salary income, i'm retired, but have a load of shares and will live off the dividends.
20k in an ISA every year.

I'm wondering which income is taken as the higher part of the combined amount?

Ignoring the initial 12570 personal allowance :-
Max Basic rate minus personal allowance minus dividend allowance minus CG allowance
50270 - 12570 - 1000 - 6000 = £30,700
If i had £30,700 (say 30K) in dividends and £30700 in capital gains, obviously I would prefer the higher rates (33.75% for dividends and 20% for capital gains) to be levied on the CG, but does the tax man calculate it in this order as well?
Does he calculate 30K at 8.75% (basic rate dividends) then 30K at 20% ( higher rate CG) or 30K at 10% (Basic rate CG), then 30K at 33.75% (higher rate dividends).

Edited by wong on Monday 3rd July 23:00

[Panamax]

Don't forget the company pays corporation tax before it declares the dividends so although it's invisible to you the effective tax rate is a lot higher than it looks. And you don't get a tax credit with your dividends. (This is why the benefit in "tax free" ISA and SIPP is not as big as it was back in the day.)

If you can keep your taxable income & gains under £50,271 and top up tax free by ISA withdrawals I think you'll suppress tax very effectively.

Also, don't forget State Pension is paid gross (no tax deducted at source) but is actually taxable income in your hands.

[wong]

Cheers,
Luckily, not old enough for state pension yet!

[Panamax]

Just to add - there's IMO a high probability of a labour government next year. What will be their tax policies?

I wouldn't be at all surprised if they immediately head in the direction of increasing CGT. Back in the Blair/Brown years income and gains were both charged at the same tax rates! They won't be concerned that CGT without indexation is effectively a wealth tax. In fact they might rather like it.

In summary, anyone who can pocket gains now at 10% (or even 20%) tax might be well advised to do so.

There are no prizes for 20:20 hindsight.

[leef44]

wong said:

Writing it out helps me think about it.

All dividends - 60K = 50270 at Basic tax rate band and 9730 at Higher rates
- minus personal allowance of 12570
- minus dividend allowance of 1000
50270-12570-1000 = 36700 to be taxed at 8.75% (=£3211.25)
and 9730 at 33.75% (=£3283.875)
Total Tax = 3211.25 + 3283.875 = £6495.125

All capital gains - 60K = 50270 at Basic tax rate band and 9730 at Higher rates
- minus personal allowance of 12570
- minus Capital gains allowance of 6000
50270 - 12570 - 6000 = 31700 to be taxed at 10% (=£3170)
and 9730 at 20% (=£1946)
Total tax = 3170 + 1964 = £5116

What if its 30K in dividends and 30K in capital gains?

From a tax view point, you have income and you have gains. Personal allowance can be offset against income but it cannot be offset against gains.

Dividends are the top slice of income. Since you don't have any other income then that is the only income.

Capital gains gets tax relief from capital gains allowance. The rest is then taxable depending on what tax band is left after dividend income.

[wong]

Thanks. I did not know that capital gains did not count as income.

[wong]

Panamax said:

Just to add - there's IMO a high probability of a labour government next year. What will be their tax policies?

I wouldn't be at all surprised if they immediately head in the direction of increasing CGT. Back in the Blair/Brown years income and gains were both charged at the same tax rates! They won't be concerned that CGT without indexation is effectively a wealth tax. In fact they might rather like it.

In summary, anyone who can pocket gains now at 10% (or even 20%) tax might be well advised to do so.

There are no prizes for 20:20 hindsight.

Thanks. I have some shares that i bought ~ 15 years ago. I don't think I have any records of the purchase price - will write to bank (who is the stockbroker). TIme to cash them in soon.

[razor11]

Interesting and pertinent topic, may I similarly clarify:

So if your UK Tax liabilities are Capital Gains plus Dividends only, am I correct in concluding that your total gain (Div + CG) can be offset against Personal Allowance + CG allowance + Div Allowance and, simplistically in essence, as long as the summation of the 3 Allowances exceeds the combined income&gain, then no UK Tax liability?

(I’ve accumulated a lot of Company shares and am currently Non-Resident for UK Tax. If the above is correct, then perhaps now might be an opportunity to dispose of the shares tax efficiently?).

Kindly set me right...thanks

[leef44]

razor11 said:

Interesting and pertinent topic, may I similarly clarify:

So if your UK Tax liabilities are Capital Gains plus Dividends only, am I correct in concluding that your total gain (Div + CG) can be offset against Personal Allowance + CG allowance + Div Allowance and, simplistically in essence, as long as the summation of the 3 Allowances exceeds the combined income&gain, then no UK Tax liability?

(I’ve accumulated a lot of Company shares and am currently Non-Resident for UK Tax. If the above is correct, then perhaps now might be an opportunity to dispose of the shares tax efficiently?).

Kindly set me right...thanks

Not that simplistic. The dividend income is treated as taxable income. You get personal allowance and dividend allowance to offset against this.

Capital gains from sale of shares is treated as taxable gains. You only get gains allowance to offset against this so even if you haven't used up your personal allowance, this cannot be used to offset against gains.

This is assuming UK dividends and not foreign dividends. If foreign dividends then you don't get the dividend allowance to offset but often these are taxed before receipt.

Also bear in mind the £6000 capital gains allowance reduces to £3000 for next tax year.

[razor11]

Thanks, much clearer and appreciated (noting my summary was not even close....). Thanks

[Mogul]

For anyone interested in doing their own Self Assessment, the (optional) "What If?" scenario planning tool which is available when you purchase a 'taxcalc' software licence (circa £55 for a year) can be quite helpful if you want to see the actual calculations performed and the order in which various 'income' streams are taxed allowing you to model what your tax bill would look like if you have the option of leaning on one or more sources of income in preference to any others.

Edited by Mogul on Tuesday 4th July 15:10