TSEM3024 | Trust income and gains: the charge on trustees: the tax pool - trustees calculate maximum discretionary payment

In this example, in the tax year 2024-2025 a trustee of a discretionary trust receives a dividend of £1,500. The trustee is chargeable at 39.35%. The standard rate band is no longer applied from 6 April 2024.

If the trustee pays the net income of £909.75 to a beneficiary, the beneficiary receives a tax credit of 45% with this payment.

The tax credit on the income payment to the beneficiary is calculated by grossing up the net payment at the appropriate tax rate.

The grossed up payment is £1,654.09 with a tax credit of £744.34 (£909.75 x 100/55=£1,654.09).

However, if there is no tax pool brought forward from the previous year and there is no other income on which tax has been paid, the tax pool of £590.25 will not cover the tax credit of £744.34 on the payment made.

Under S496 the trustee would have to pay an additional income tax charge of £154.09 (tax credit £744.34 less available tax pool of £590.25 = £154.09), but the trustees have no income available to pay this.

The maximum amount available for distribution to a beneficiary is 55% of the income after expenses, leaving the balance of 45% to cover the tax on the income and the additional tax charge under S496.

Where the tax credit is partially covered by a balance in the tax pool brought forward, the amount available for distribution is 55% of the income available after tax, plus the updated balance in the tax pool.

The beneficiary is paid net income of £825 with a tax credit of £675, which is equivalent to gross income of £1,500 with a tax credit at 45%.

The trustee pays a total of £675 tax to HMRC, £590.25 tax on the dividend received and the additional £84.75 under S496.