Mixed Budget News

masonic

bowlhead99 wrote: »

As they are always looked at as the top slice of your pile of income, it is not possible for them to 'get in the way' of you accessing the 0% band for interest income that sits right on top of your general annual personal allowance of £10600. So someone with a £10k salary and £5k interest can have all their interest fall into the [personal-allowance and 0%-on-interest bands], whether or not they have any dividends on top of all that.

That certainly makes sense, but what wasn't clear to me was whether this same logic could be applied to the rules for the removal of the nil rate band from those earning more than £15,600.

I've found another document, the HMRC bulletin and FAQ issued in March 2014 relating to the changes that came into effect in April 2015 (link). This states:

You could benefit if:
• your total taxable income in 2015-16 will be below £15,500 [now £15,600], or
• your total taxable non-savings income in 2015-16 (such as earnings or pensions) will be below £15,500.

...

Example 1 – I expect to have both savings and non-savings income
...
• If your total taxable non-savings income (such as earnings or pensions) for 2015-16 will be more than £15,500, there will be no change and your savings income will continue to be liable to tax as currently.

Further details of what is taxable income can be found at:
http://www.hmrc.gov.uk/incometax/taxable-income.htm

The link at the bottom now redirects to a new page, but a snapshot from 2014 shows that it included the following item:

Investment income
Dividends on company shares - not including dividend income from ISAs.

So, while I accept that dividend income is treated as the highest part of a person's income and would therefore not use up any lower bands of income tax, it still appears to me that what is included in the "total taxable income" figure used for the test of whether a person qualifies for the nil rate band on savings interest is unclear. If they do not qualify for this nil rate band, then the dividends have not fallen somewhere in the middle of the stack of income; they have just disqualified the individual from utilising this band of income tax in much the same way that very high incomes can reduce one's personal allowance.

I still think the jury is out on this one.

averageguy11

colsten wrote: »

I think you mean the tax free amount for letting one or more rooms in hour main residence? That's very different to letting residential property you don't live in and for which you might have a BTL mortgage, which is what jimjames is talking about.

Different but related...it was mentioned by Mr O in almost the same breath ..and actually rather important i would have thought

kevin52

I'm a higher rate taxpayer. I have used up my ISA allowance for this year. Can I buy an equity fund outside the ISA and have the income count towards the £5.000 tax free dividend allowance?

masonic

kevin52 wrote: »

I'm a higher rate taxpayer. I have used up my ISA allowance for this year. Can I buy an equity fund outside the ISA and have the income count towards the £5.000 tax free dividend allowance?

Not for any dividends received in this tax year, but the income in the next tax year will count towards the new £5k allowance.

charlieboycat

masonic wrote: »

So, while I accept that dividend income is treated as the highest part of a person's income and would therefore not use up any lower bands of income tax, it still appears to me that what is included in the "total taxable income" figure used for the test of whether a person qualifies for the nil rate band on savings interest is unclear. If they do not qualify for this nil rate band, then the dividends have not fallen somewhere in the middle of the stack of income; they have just disqualified the individual from utilising this band of income tax in much the same way that very high incomes can reduce one's personal allowance.

I still think the jury is out on this one.

The answer is to be found in the relevant legislation - in this case Income Tax Act 2007 - see http://www.legislation.gov.uk/ukpga/2007/3/contents/enacted . Section 18 defines "savings income", section 19 defines "dividend income". Interest falls within the definition of "savings income". Section 16 subsection 5(b) specifies that where you have both then "dividend income" is to be treated as "higher" than "savings income".

The difficulty, of course, is interpreting all this! The Institute of Tax explain it thus: http://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-to-me . Note in particular: "As your taxable dividend income is treated as being taxed after your earned income and your savings income, the tax rates that apply to your taxable dividend income depend on how much earned income and savings income you have."

Since the technical meaning of "savings income" excludes "dividend income" by definition, one could easily think that the phrase "non-savings income" would include "dividend income". It is unfortunate, if not reprehensible, that both the Revenue manuals and the Institute of Tax use the phrase "non-savings income" as sloppy shorthand when what they actually mean is "taxable income which is neither section 18 savings income nor section 19 dividend income".

kidmugsy

masonic wrote: »

Not for any dividends received in this tax year, but the income in the next tax year will count towards the new £5k allowance.

Yes; or even use some pension annual allowance this year.

grey_gym_sock

to add to the fun, the manual sometimes (at http://www.hmrc.gov.uk/manuals/saimmanual/saim1110.htm ) implicitly uses the term "savings income" as covering both interest (section 18 savings income) and dividends:

In the tax year 2014-15 Jane has income of £43000 from employment, and savings income in the form of net building society interest of £800 and dividends of £9000.

so i think that, in 2016-17, you will be able to receive £17,000 in interest plus £5,000 in dividends and pay no tax.

to look at it another way, what has been the least tax you could pay with an income of £50,000?

in 2014-15, the tax-minimizing mix of income was £10,000 interest + £40,000 dividends. the interest was set against the personal allowance. the dividends were (with the 10% "tax credit") treated as a gross income of £44,444, which pushed you £12,579 into the higher-rate band; the latter was taxed at 32.5%, less the 10% credit, so you actually paid £2,830.27.

in 2015-16, the optimal mix is £15,600 interest + £34,400 dividends. the interest is set against the £10,600 personal allowance and £5,000 zero-starting-rate band. the dividends are grossed up to £38,222, which pushes you £11,437 into higher-rate band; so you pay tax of £2,573.32.

in 2016-17, the optimal mix will be £16,500 interest + £33,500 dividends. (if you didn't reach higher-rate, it would be £17,000 interest + the rest as dividends.) the interest is set against the £11,000 personal allowance, £500 personal saving allowance (not £1,000 because you're into higher-rate), and £5,000 zero-starting-rate band. the dividends are no longer inflated with the 10% "tax credit", so £5,000 goes against the dividend allowance, and £27,000 is taxed at 7.5%, and the remaining £1,500 is taxed at 32.5% - which comes to tax of £2,512.5.

so the minimum tax on £50,000 income is declining slightly each year (though you'd expect that from indexation, anyway), and is still around £2,500, i.e. 5% of income.

meanwhile, if you have a salary of £50,000, you pay about £13,500 in income tax + employee NIC, i.e. 27%. (this ignores employer NIC; but then for dividends i was ignoring corporation tax.)

masonic

charlieboycat wrote: »

Since the technical meaning of "savings income" excludes "dividend income" by definition, one could easily think that the phrase "non-savings income" would include "dividend income". It is unfortunate, if not reprehensible, that both the Revenue manuals and the Institute of Tax use the phrase "non-savings income" as sloppy shorthand when what they actually mean is "taxable income which is neither section 18 savings income nor section 19 dividend income".

Perhaps, although according to the bulletin, "If your total taxable income for 2015-16 will be more than £15,500 [now £15,600], but your nonsavings income (such as earnings or pensions) will be less than £15,500, you will not be liable to pay tax on part of your savings income. This will be the amount of your savings income that - when you add it to your other taxable income - comes to £15,500."

charlieboycat

Masonic - If you are registered for online self assessment but haven't yet submitted your 2014-15 tax return try it's tax calculator with some dummy figures. You'll find that it allows the 10% starting rate on savings despite significant dividends. If you aren't registered, or have already submitted, try the same thing with Which's online calculator at http://money.which.co.uk/tax-calculator

The principle of the calculation did not change for 2015-16, although the rate (0%) and the band-width (£5,000) are of course different.

masonic

charlieboycat wrote: »

If you aren't registered, or have already submitted, try the same thing with Which's online calculator at http://money.which.co.uk/tax-calculator

The principle of the calculation did not change for 2015-16, although the rate (0%) and the band-width (£5,000) are of course different.

Thanks, that's (finally) convinced me. It's definitely allowing me savings at the 10% rate with a small employment income and huge dividend income.

So in 2016/17 it will be possible to earn up to £22,000 without paying a penny of income tax based on what we currently know.