Who can claim £5,000 tax-free interest?

xylophone

If you go to this link

https://www.litrg.org.uk/tax-guides/other-tax-issues/savings-and-tax#toc-how-is-dividend-income-taxed-

and click on the link to Savings and Dividends tax you can pick up the 2018-19 fact sheet.

eskbanker

Kenhere wrote: »

Thanks eskbanker
So it is possible to use the £2,000 dividend allowance in addition to the other tax allowances and achieve a total of £19,850 p.a. totally tax free?

Although the simple answer to your question is yes (as colsten has already said), this figure still doesn't represent the maximum annual income that gives rise to no tax because of course there are ISAs that are genuinely completely tax-free, plus salary sacrifices that can be used to lower taxable income, and pension contributions, CGT allowances, transferable marriage allowances, etc, etc.

In other words, it's probably better to consider your finances in the round rather than homing in on a notional figure that relates to a very specific and unusual combination of circumstances. Many posters have started threads specifically aiming to minimise tax rather than to maximise return, which often leads to a mistaken belief that ISAs (which may be the correct answer to one but not the other) are the right approach to take....

polymaff

And nobody has mentioned optimal allocation of Personal Allowances, yet

Or order of taxation :)

polymaff

colsten wrote: »

It is. Not too many people will have very low income yet have enough unwrapped cash savings for £5K interest, and unwrapped investments yielding £2K dividends.

Actually, not so. The current situation could have been designed specifically for the benefit of Personal Service Company director/shareholders, where the common scenario is low Taxable Non-Savings income, often Taxable Savings Income and masses of Dividend Income.

And who is to say that it wasn't?

Dazed_and_confused

Haven't run the numbers precisely but I think an elderly pensioner entitled to Married Couple's Allowance could have around £30k of taxable income in the current tax year without actually having any tax to pay if they managed to have the right types and amounts of each type of income.

Say,
£11,850 in pension income - no tax because of the Personal Allowance
£6,000 in savings interest - no tax payable because of the starter savings and Personal Savings Allowance 0% rates
£12,000 in dividends

£2,000 of the dividends will be taxed at 0% and £10,000 at 7.5%

Tax due is £750 less Married Couple's Allowance credit = no tax to pay.

Might be possible to have a bit more dividend income but they would be in the realms of income reduced Married Couple's Allowance so exact maximum income figure with no tax to pay is a little trickier to calculate

Kenhere

“Thanks eskbanker
So it is possible to use the £2,000 dividend allowance in addition to the other tax allowances and achieve a total of £19,850 p.a. totally tax free?
Originally posted by Kenhere

”It is. Not too many people will have very low income yet have enough unwrapped cash savings for £5K interest, and unwrapped investments yielding £2K dividends."
Originally posted by colsten

Am I right to interpret the low "income" to mean income from paid employment and/or pension? So in the case of someone who is not working, if they hold unwrapped P2P that is generating £14,000 interest, they can utilise the £5,000 tax free "starting rate" plus the £1,000 tax free savings interest allowance. Their £11,850 nil rate income tax allowancecan then cover £8,000 interest, plus £3,850 of dividends. That is £17,850. Finally they can still receive a further £2,000 dividends to utilise the £2,000 tax free dividend allowance. Total tax free income £19,850.
Correct?

dazed and confused, interesting idea about taking £12,000 dividend and offsetting the £750 tax with the married couple allowance!

ColdIron

You're over thinking this. Where are your dividends coming from?

Dazed_and_confused

Have a look at the examples on the final page of the document in this link. The final example for Findlay is the situation closest to what you describe.

https://www.litrg.org.uk/tax-guides/other-tax-issues/savings-and-tax

It is non-savings income which counts so things like taxable salary, company benefits, self employment, rental income, State Pension and other pensions or annuities. Savings interest and dividends are separate to this so you can have £30k income and still get the savings starter rate if you have low enough non-savings income.

Dazed_and_confused

So in the case of someone who is not working, if they hold unwrapped P2P that is generating £14,000 interest, they can utilise the £5,000 tax free "starting rate" plus the £1,000 tax free savings interest allowance. Their £11,850 nil rate income tax allowancecan then cover £8,000 interest, plus £3,850 of dividends. That is £17,850. Finally they can still receive a further £2,000 dividends to utilise the £2,000 tax free dividend allowance. Total tax free income £19,850.
Correct?

Possibly but not the way you've outlined it.

Each type of income is taxed in a particular order, non-savings income first then savings interest and finally dividends.

Your example is very confusing, can you say clearly what the taxable income is for each different income type and then it will be possible to work out if any tax is due to be paid.

On second thoughts is it £14,000 interest plus £5,850 dividends with Personal Allowance allocated in a non standard way to make use best use of the 0% savings rate bands? If the only income is from savings and dividends then I think any combination upto £19,850 which consists of at least £6,000 interest and £2,000 dividends would end up with zero tax payable.

Kenhere

dazed and confused, yes going back to the earlier point about having savings/investments but low income, the reason is that both have ISAs but only one has the SIPP, P2P a BTL and a share dealing account. Both will have no other income (except anything taken from ISAs). So in retirement taxable income will be from:

SIPP £400k dividends £7,200 p.a.
SDA £300k dividends £5,400 p a.
unrealized capital gains to date £150,000
P2P £200k interest £14,000 p.a.
BTL taxable net income £10,000 p.a.

So the is scope for some of the investments to be transferred to the spouse who holds none, to maximize all tax free allowances on the interest and dividend income and take up CGT allowance. But I am not sure of the order in which income is taken and taxed to get the optimum split correct.