8.3 Income tax
In most circumstances, members of a society must pay income tax on all their earnings and receipts from the society (See HMRC Self-Assessment Claims Manual SACM). In the context of community shares, these receipts will normally be in the form of interest on share capital. Interest on share capital is a deductible expense for corporation tax purposes, but the receipt is liable for income tax payable by the member. HMRC does not normall require societies to deduct income tax on share interest paid to members; but it is the responsibility of members to declare their gross earnings and receipts to HMRC, including any such share interest payments. Societies are obliged to inform HMRC of any gross interest payments to members on shares or loans to the value of £250 or more per annum, by providing the names and contact details of these members. If share interest is paid to members who are non-UK residents, the society must deduct income tax from the payment (see HMRC manual SAIM 9200).
However, interest paid on withdrawable shares in societies is eligible for the new Personal Savings Allowance (PSA), introduced on 6 April 2016. The PSA will apply a new 0% rate for up to £1,000 of savings income received by a basic rate (20%) taxpayer, or up to £500 of savings income for a higher rate (40%) taxpayer. The PSA will not apply to savings income received by 45% additional rate taxpayers.
If a member already pays tax through a PAYE code, and their total untaxed income from savings and investments is less than £2,500, they can request that any tax they owe is collected through their tax code. If their income from these sources is £2,500 or more they will need to complete a tax return.
A co-operative society may also pay members a dividend (also referred to as a discount, bonus, or rebate) based on their transactions with the society. Such payments are a deductible expense for corporation tax purposes. However, it may or may not be a taxable income for the member. This will depend on the nature of the dividend and the nature of the transactions upon which the dividend is based. For co-operative societies where the dividend is based on retail purchases of members, the dividend is effectively a discount on the purchase price and is not treated as taxable income. But for a co-operative society where the dividend is based on sales or purchases by members, such as members of an agricultural co-operative, then the dividend is a receipt of the member and is taxable income.
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