SQE 1 Prep Test - A woman owns shares in a private limited company. The shares are not in an ISA. In the 2020/21 tax year the woman receives a dividend of £5,000. Her only other source of income in the tax year is her salary. Her taxable income, including the dividend, is £41,000.The personal allowance for 2020/21 is £12,500. The basic rate tax band for 2020/21 is £12,501-£50,000; the dividend allowance is £2,000.How much Income Tax, if any, should the woman pay on the dividend?

SRA Samples

A woman owns shares in a private limited company.

The shares are not in an ISA. In the 2020/21 tax year the woman receives a dividend of £5,000. Her only other source of income in the tax year is her salary. Her taxable income, including the dividend, is £41,000.The personal allowance for 2020/21 is £12,500.

The basic rate tax band for 2020/21 is £12,501-£50,000; the dividend allowance is £2,000.How much Income Tax, if any, should the woman pay on the dividend?

(A) None, because the dividend was paid by a private limited company whose payment of Corporation Tax on its distributable profits satisfies the woman’s liability to income tax.

(B) None, because her total income including the dividend does not exceed the upper threshold for basic rate tax.

(C) She will have to pay Income Tax at the Income Tax basic rate on the entire dividend because it exceeds her annual dividend allowance.

(D) She will have to pay Income Tax at the appropriate dividend tax rate on the proportion of the dividend that exceeds her annual dividend allowance.

(E) She will have to pay Income Tax at the Income Tax additional rate on the proportion of the dividend that exceeds her annual dividend allowance.

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