Summary
Business Dividend Income is treated as investment income in Timeline Planning.
Taxation on Business Dividend Income is subject to different tax bands and rates than income tax.
Option to adjust for inflation based on CPI, with a 0% collar to prevent income reduction.
Description
In Timeline Planning, understanding how different income types are treated is crucial for comprehensive financial planning. Business Dividend Income is especially relevant for investors and entrepreneurs who receive income through dividends from business investments. This article explores the taxation and treatment of Business Dividend Income within Timeline Planning, offering insights into its impact on financial scenarios.
Business Dividend Income Explained
Business Dividend Income in Timeline Planning refers to the portion of a company's earnings distributed to its shareholders. It is classified separately from earned income, such as wages or salaries. When setting up financial plans in Timeline Planning, advisors can accurately reflect a client's income sources, including dividends, to provide a realistic overview of their financial situation.
Taxation
Dividends are taxed differently than earned income. Timeline Planning calculates the tax on Business Dividend Income using the latest dividend tax rates and bands, providing a clear view of the net income after taxes.
Adjustments and Reinvestment Options
Advisors have the option to adjust Business Dividend Income for inflation. This ensures the real value of income is maintained over time.
Example
Imagine Jane, who owns shares in a company from which she receives £20,000 annually in dividends and a defined benefits pension of £5,000. Timeline Planning calculates her dividend tax as follows, assuming the current tax year's rates (2024/2025):
Defined benefit pension
Annual Amount: £5,000
Income Tax: The defined benefits pension is taxable income, but within this scenario, Alex's total income is below the personal allowance threshold, making this portion of his income not subject to tax.
Business Dividend Income
Annual Amount: £20,000
Taxation:
The first £500 of dividend income is tax-free due to the dividend allowance.
We need to discount the Tax-free personal allowance that is left from the defined benefits pension from the remaining £19,500:
£12,570 - £5,000 = £7,570
£19,500 - £7,570 = £11,930
The remaining £11,930 is taxed at the dividend basic rate of 8.75% since the total income falls within the basic income tax band.
Calculating Tax on Dividend Income:
£11,930 at 8.75% tax rate = £1,044
Dividend income tax = £1,044
Conclusion
Business Dividend Income offers a different approach to income and investment growth. By understanding the tax implications and options, advisors can craft effective financial strategies for their clients.