A simple, visual model of 2016/17

grey_gym_sock

MoneySavingUser wrote: »

Actually, you have always had the choice of using it any way you please, its just that in prior years you were never better off using it a different way, now you are.

http://www.legislation.gov.uk/ukpga/2007/3/section/25

Basically the default order is non-savings, then savings, then dividends.

However, you can allocate the personal allowance how you see fit (it just happens that 16/17 is the first year where it has been useful to do it in another way).

aha! ... this is starting to make sense (or i hope so ).

the provision you link to, about deducting "the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax", is about applying the personal allowance (and the blind person's allowance, and various kinds of loss relief).

it's not about applying the personal savings allowance, or the dividend allowance, since they are involved at step 4 of the calculation, not at step 2 or 3 - see http://www.legislation.gov.uk/ukpga/2007/3/section/23

the order of savings (used in step 4) is defined here: http://www.legislation.gov.uk/ukpga/2007/3/section/16 ... basically, a complicated way of saying that non-savings income is lowest, savings income in the middle, and dividend income at the top.

the personal savings allowance - which actually seems to be called the "savings nil rate" - is covered in Finance Act 2016 here: http://www.legislation.gov.uk/ukpga/2016/24/section/4 ... this says (as expected) that it's the first £1000/£500 of remaining savings income that's taxed at 0%.

and the dividend allowance - actually, the "dividend nil rate" - here: http://www.legislation.gov.uk/ukpga/2016/24/section/5 ... which says that it's the first remaining £5,000 of dividend income that's taxed at 0%.

this is fine, however it makes the visual model more complicated ...

the default order, of non-savings income below savings income below dividend income, is usually all you need.

but you have the option of pulling some of the dividend income down to the bottom of the stack, which pushes all the non-savings and savings income upwards. you can pull down any amount of dividend income from nil up to £11,000 (more precisely: up to the level of the lowest of the 3 horizontal lines you drew).

you should "pull down" the amount of dividend income which minimizes the income tax due (note that there may be several, equally valid, answers) - however, it is not simple to say what that amount is. but we can say that, unless you have over £5,000 dividend income, there is no need to pull any of it down.

(there is - fortunately - never any need to swap the positions of non-savings and savings income.)

grey_gym_sock

kidmugsy wrote: »

Thank you. How about my hypothetical taxpayer. Salary £8k; taxable interest £600; dividends £40k?

Dazed & Confused's calculation in post #4 is correct (i now think).

polymaff

MoneySavingUser wrote: »

Actually, you have always had the choice of using it any way you please, its just that in prior years you were never better off using it a different way, now you are.

Online Self Assessment has always assumed that there is a fixed order of consumption of Allowances and Reliefs - and the representation of the Starting Rate Allowance has been based on this order. The latter may explain why the current online self-assessment process is admitted not to handle SRA correctly. In SA2016/17 just how does one define the relationship between SRA and the allowances and reliefs?

grey_gym_sock

polymaff wrote: »

Online Self Assessment has always assumed that there is a fixed order of consumption of Allowances and Reliefs - and the representation of the Starting Rate Allowance has been based on this order. The latter may explain why the current online self-assessment process is admitted not to handle SRA correctly. In SA2016/17 just how does one define the relationship between SRA and the allowances and reliefs?

i think the idea (in the legislation) is ...

a choice of order applies to allowances and reliefs.

SRA, and PSA, and dividend allowance, are not allowances (nor reliefs). they're tax bands (which happen to have 0% rates).

you can choose what kinds of income to set against your allowances and reliefs. then, whatever income is left over is set against tax bands in a fixed order (non-savings, then savings, then dividends).

polymaff

grey_gym_sock wrote: »

i think the idea (in the legislation) is ...

a choice of order applies to allowances and reliefs.

SRA, and PSA, and dividend allowance, are not allowances (nor reliefs). they're tax bands (which happen to have 0% rates).

you can choose what kinds of income to set against your allowances and reliefs. then, whatever income is left over is set against tax bands in a fixed order (non-savings, then savings, then dividends).

Agreed. Perhaps they should be SRB, PSB and DB. But what of my question regarding SRB? If you have £1 of non-savings income and choose to devote none of your Allowances and Reliefs to non-savings income the SRB is unavailable? Maybe it is this sort of jeopardy that is the cause of the failure of HMRC to get it right for 2016/17.

kidmugsy

grey_gym_sock wrote: »

Dazed & Confused's calculation in post #4 is correct (i now think).

Thanks; so that's a rejection of polymaff's column then? (Or had I misinterpreted his column?)

I think I'll give up; things seem hopeless when HMRC apparently doesn't know what it's doing. Thanks to polymaff for at least clarifying the existence of their confusion.

grey_gym_sock

polymaff wrote: »

But what of my question regarding SRB? If you have £1 of non-savings income and choose to devote none of your Allowances and Reliefs to non-savings income the SRB is unavailable?

i assume the 1st £1 of the SRB is wasted (because of that £1 is non-savings income), but the remaining £4,999 is available.

grey_gym_sock

kidmugsy wrote: »

Thanks; so that's a rejection of polymaff's column then?

yes, i think it no longer works in 2016/17.

to save it, it needs an extra provision, about how you can pull up to £11,000 of dividend income down to the bottom of the column, when that reduces the tax due. still visual, but not nearly so simple.

polymaff

grey_gym_sock wrote: »

i assume the 1st £1 of the SRB is wasted (because of that £1 is non-savings income), but the remaining £4,999 is available.

Yes, OK, but what if the £1 was £5,000?

Before this you'd get the SRB - but now?

EDIT: So, what are the criteria that determine when and how much of the SRB is available?

polymaff

grey_gym_sock wrote: »

yes, i think it no longer works in 2016/17.

to save it, it needs an extra provision, about how you can pull up to £11,000 of dividend income down to the bottom of the column, when that reduces the tax due. still visual, but not nearly so simple.

Oh, I think that is a mite premature! The current model deals with income up to £43,000 correctly.

If you like, I'll post where I am now with updating the simple visual model to what we know of the new processes.