Tax effect of private pension contributions in selfassesment

YellowSock

I am trying to understand how a personal contribution into a SIPP affects tax relief via self assesment.

For tax year 2016/17
income is taxed at 20%/40%/45% (basic/higher/additional rate),
dividends at 7.5%/32.5%/38.1%,
capital gains (shares) at 10%/20%

Let's say someone's income is taxed at 40%, dividends at 32.5% and capital gains at 20%.
This person pays £80 into a personal pension (SIPP). He gets £20 basic tax rate relief paid into this pension.
Further in this self assesment his basic tax rate band gets increased by £80+£20=£100. He pays therefore another £20 less income tax.

What I am not clear about is what happens to the tax on dividends and capital gains?
Does this person also pay £25 less tax on dividends (instead of 32.5% of £100 only 7.5% of £100 which is a saving of £25) and £10 less on capital gains (instead of 20% of £100 only 10% of £100)?
Or is the tax basic band increase of £100 only applied to the income tax and not to dividends and capital gains?

Thank you very much for your help!

zagfles

I think you have a fundamental misunderstanding about how tax is calculated.

You have a basic rate band, normally £32,000. It can only be used once. Not separately for each income type!

There's rules as to what order income uses the bands, employment income comes before interest dividends etc. If (eg) employment income uses all the basic rate band, then stuff like interest, dividends (after the interest/dividend allowances) will all be taxed at the higher rate.

If you make penbsion contributions then all that happens is the basic rate band is increased eg from £32000 to £32100 in your example. Assuming employment income was at least £100 into the higher rate band, then it would save £20 tax on employment income and nothing on anything else. You can only use the BR band once.

YellowSock

Thank you for this clarification. I had never understood how tax bands work for different types of taxes but I do now thanks to your reply.