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Examination Timing: 00H03M20S

Ms. Carter owns shares in a private limited company, and these shares are not held in an Individual Savings Account (ISA). In the 2023/24 tax year, she receives a dividend of £5,000. Her only other source of income is her salary, bringing her total taxable income, including the dividend, to £41,000. For the 2023/24 tax year, the personal allowance is £12,570, the basic rate tax band is £12,571-£50,270, and the dividend allowance is £1,000. 

How much Income Tax, if any, should Ms. Carter pay on the dividend?

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Ms. Carter needs to pay Income Tax on the dividend income that exceeds her annual dividend allowance. For the 2023/24 tax year, the dividend allowance is £1,000, which means the first £1,000 of her dividend income is tax-free. The remaining £4,000 (£5,000 - £1,000) is taxable. Since her total taxable income, including the dividend, falls within the basic rate tax band (£12,571-£50,270), the appropriate dividend tax rate is 8.75%. Calculations: Total dividend received: £5,000 Dividend allowance: £1,000 Taxable dividend: £5,000 - £1,000 = £4,000 Tax rate for dividends within the basic rate band: 8.75% Tax payable on the taxable dividend: £4,000 x 8.75% = £350 Therefore, Ms. Carter should pay £350 in Income Tax on her dividend income. 

Key Point: Dividend income exceeding the annual dividend allowance is taxed at specific rates depending on the individual's income tax band. For the basic rate band, the dividend tax rate is 8.75% for the 2023/24 tax year. It's important to consider these rates to accurately calculate the tax liability on dividends.

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