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

Dazed_and_confused

Non savings income such as rents, pensions, wages is taxed first. Then savings interest.
Then dividends. Capital Gains aren't subject to income tax and are taxed last (although the tax rate applied to the gain is or can be based on the income tax position of the individual I think).

However, you can allocate the Personal Allowance however that produces the lowest overall liability, it doesn't have to be allocated in the same order as the income after the Personal Allowance is then taxed.

Why have you included the SIPP dividends as taxable income? What is making these taxable?

If you are thinking of transferring assets might you benefit from professional advice?

Kenhere

Dazed_and_confused wrote: »

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, thanks for this. But I cannot find any example for "Findlay" on the link - is this the right link?

Kenhere

Sibbers123 wrote: »

You don't claim them as such - they are automatic if you qualify.

Not many individuals qualify for the starting rate. Your interest needs to fall within the first £5,000 of your taxable income which rules out 95% of the working population.

The personal savings allowance will depend on what type of tax payer you are (basic rate = £1,000, Higher rate = £500 and additional rate = £0).

So this means if you have the following income:
£5,000 dividends
£10,000 BTL rental income
£6,000 in interest

Then you would not get the £5,000 nil tax starting rate on the £6,000 interest, because the interest would not fall within the first £5,000 of taxable income - the £10,000 from BLT would be counted first? Even if the BTL itself will not actually be taxed because it falls within the Personal Income Tax allowance £11,850?
You would however get the separate £1,000 interest allowance as total income is in the Basic Rate tax band, and also the dividends are taxed separately with £2,000 being tax free and tax @ 7.5% on the remaining £3,000.
So in the above scenario total income is £21,000, tax due = £1,225
Dividends £3,000 x 7.5% = £225
Interest (assuming I am right and there is no £5,000 allowance in this case) = £5,000 x 20% = £1,000

polymaff

All sounds like a case for my "Simple, Visual, Model" - suitably updated for 2018/19..

polymaff

Kenhere wrote: »

So this means if you have the following income:
£5,000 dividends
£10,000 BTL rental income
£6,000 in interest

Then you would not get the £5,000 nil tax starting rate on the £6,000 interest, because the interest would not fall within the first £5,000 of taxable income - the £10,000 from BLT would be counted first? Even if the BTL itself will not actually be taxed because it falls within the Personal Income Tax allowance £11,850?

No, you could get the full starting rate -if you apply £10,000 of your Personal Allowances to your Taxable Non-Savings Income (HMRC terminology!)

I hinted earlier that certain topics were being ignored. What I can also see happening in this thread is a lot of "old" thinking - and it is making it far more difficult for you to get a grip on what is a "new" but quite simple philosophy.

Kenhere

Ah! So with the right asset holdings spli/transferred between spouses, one spouse could hold assets that produce:

£10,000 BTL rental income
£6,000 interest
£5,000 dividends

£11,850 0% tax Personal Allowance covers £10,000 BTL income
Any other income from SIPP or State Pension (or hypothetically employment) would also be taxed at this point, so this spouse has £1,850 Personal Allowance unused.

Next step, the total of BTL, SIPP, State Pension AND interest income is £16,000 so less than £16,850 the upper limit for claiming the starting rate £5,000 nil tax on interest. So £5,000 of the interest is tax free.

Total of BTL, SIPP, State Pension, and interest income is £16,000 which is also within the Basic Rate for income tax so the £1,000 savings allowance applies on interest, so added to the £5,000 allowance all £6,000 interest is tax free.

Finally dividend income is taxed. Dividends are £5,000. £2,000 are nil tax with dividend allowance. Total of BTL, SIPP, State Pension, and interest income is £16,000 which is within the Basic Rate for income tax so the taxable £3,000 of dividends are taxed at 7.5%. Total tax due = £225.

But there is still £1,850 of £11,850 Personal Allowance not taken up, so is that now used to offset the £3,000 taxable dividends, leaving only £1,150 of dividends on which tax is due @ 7.5% = £86.25 tax due? Not sure as it has been emphasized repeatedly that interest and dividend taxes are independent of taxation on non-savings income.

So £225 or £86.25?

polymaff

The lower figure

Dazed_and_confused

Dazed and confused, thanks for this. But I cannot find any example for "Findlay" on the link - is this the right link?

Yes, you need to click on the factsheet link, the first link on the page

Dazed_and_confused

Kenhere

It might just be how you've worded it but your example at 4:49 is confusing!

You have three types of income to start,
£10,000 BTL rental income
£6,000 interest
£5,000 dividends

But later on talk about SIPP and State Pension.

Definitely Dazed and Confused here!

Kenhere

Dazed and confused

You mean where I said
"Next step, the total of BTL, SIPP, State Pension AND interest income is £16,000 so less than £16,850 the upper limit for claiming the starting rate £5,000 nil tax on interest. So £5,000 of the interest is tax free."

In future SIPPand State Pension will be something I would need to factor in, so I was just trying to clarify all the sources of income which in total determine whether you qualify for £5,000 Startjng Rate, and again in the next step the same sources of income totalled to determine if the Basic Rate of income tax band applies for the £1,000 savings allowance.Also trying to check I am now applying the correct order in which income sources must be taxed to determine any allowances thereon.

Finally dividends and tax thereon are calculated last.

One point that seems odd is that most information about the £5,000 "Starting Rate" says you only get it if total income is less than £16,850. But as I understand it, for every £1 over £11,850 of income you lose £1 of SR, so by the time your earnings each £16,850 surely you have £0 SR allowance left. Is it not the case that actually you only get the full £5,000 SR allowance on interest if earnings are no more than £11,850, and then you get £1 less SR for each £1 of income over that? It seems the £11,850 earnings limit is the main figure to bear in mind if you want to take advantage of the full £5,000 SR but most information quotes £16,850 as the relevant figure for SR.