Calculation of dividend and shareholder loan credits (zero / ten tax system)

A shareholder is entitled to claim a tax credit in a number of situations. These include where a Jersey resident shareholder of a company has been assessed and charged to tax on:

deemed interim dividend from a Jersey trading company
deemed dividend from a Jersey financial services company
a profit attributed from an investment holding or personal services company
a shareholder loan

In any of these circumstances, the shareholder is entitled to claim a tax credit when a cash dividend (paid out of the profits subject to the above) is assessed and charged to tax or when a shareholder loan has been repaid.

The tax credit is calculated using a tax effective rate.

A tax effective rate is the percentage of tax you pay on each £1 of income charged to tax.

If the shareholder had no tax to pay on any of the above when they were assessed and charged on the shareholder, because their income was below the tax exemption threshold, then the tax effective rate is 0%.

How to calculate a tax effective rate: Example 1

This is the first example of how to calculate a tax effective rate for the purpose of determining a dividend or shareholder loan tax credit.

Marginal relief calculation

Calculation of income		Allowances, reliefs and deductions
Fees	£50,000	Personal allowance single	£1,040
Bank interest	£1,000	Earned income allowance	£1,360
Shareholder loan	£10,000	Qualifying interest paid	*£5,000
Taxed at source dividend (20%)	£2,000	Employment expenses	£200
		Pension contributions	£3,000
Total	£63,000		£10,600

*This figure is calculated in the following way:

qualifying interest paid = £12,500 (see below - calculation of marginal relief)

but sum is restricted under Article 90D of the Income Tax Law:

£12,500 x 60% = £7,500

£12,500 less £7,500 = £5,000

Calculation of marginal relief
Total (see above)		£63,000
Less
Qualifying interest	*£12,500
Employment expenses	£200
Pension contributions	£3,000	£47,300
Exemption threshold	£12,650	£34,650
Marginal relief calculation		£34,650 @ 27% = £9,355.50

*Not restricted in marginal relief calculation - as per Article 92C (2) of the Income Tax Law.

Calculation of total tax payable
Income	£63,000
Less allowances etc.	£10,600
	£52,400	@ 20%	£10,480
Less marginal relief			£1,124
Total tax payable			£9,355.50

Income for the purpose of calculating the tax effective rate

Income is calculated in the following way:

Calculating the income for tax effective rate
Employment (fees)		£50,000
Less
Employment expenses	£200
Pension contributions	£3,000
	= £3,200	£46,800
Plus
Bank interest		£1,000
Shareholder loan		£10,000
Taxed at source dividend (20%)		£2,000
Income		£59,800

Total tax payable / income x 100 = % tax effective rate

£9,355.50 / £59,800 x 100 = 15.64%

Credit available when shareholder loan of £10,000 is repaid.
£10,000 @ 15.64% = £1,564 credit

If the tax deducted at source on the dividend showed a tax credit of 10% then the total tax payable figure would remain the same (ie £9,355.50) and so would the 15.64% tax effective rate.

How to calculate a tax effective rate: Example 2

Year of assessment

Income		Allowances, reliefs and deductions
Fees	£79,000	Personal allowance single	£1,040
Bank interest	£1,000	Earned income allowance	£1,360
Shareholder loan	£10,000	Qualifying interest paid	*£5,000
Taxed at source dividend (20%)	gross £2,000	Employment expenses	£200
		Pension contributions	£3,000
Total	£92,000		£10,600

* Qualifying interest paid = £12,500.
   Restricted under Article 90D of the Income Tax Law.
   £12,500 x 60% = £7,500
   £12,500 less £7,500 = £5,000

Total tax payable
Income	£92,000
Less allowances etc.	£10,600
Total tax payable	£81,400 @ 20% =	£16,280

Income for the purpose of calculating the tax effective rate

Income is calculated in the following way:

Calculating the income for tax effective rate
Employment (fees)		£79,000
Less
Employment expenses	£200
Pension contributions	£3,000
	= £3,200	£75,800
Plus
Bank interest		£1,000
Shareholder loan		£10,000
Taxed at source dividend (20%)		gross £2,000
Income		£88,000

Total tax payable / income x 100 = % tax effective rate

£16,280 / 88,800 x 100 = 18.33%

Credit available when shareholder loan of £10,000 is repaid.
£10,000 @ 18.33% = £1,833 credit

If the tax deducted at source on the dividend showed a tax credit of 10% then total tax payable figure would remain the same (ie £16,280) and so would the 18.33% tax effective rate.