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

Dazed_and_confused

There are all sorts s of things which can be included in non-savings income. Common things being pension income (including State Pension), taxable wages, company benefits, DWP benefits, self employment profits and rental income.

Yes it's a sliding scale. And £16,850 is where it stops being available which is why that figure is often used.

Current year for most people with non savings income of £11,850 or less will leave £5,000 savings starter rate available.

If non savings income was say £13,500 then the maximum savings starter rate available would be £3,350.

The savings nil rate (known as Personal Savings Allowance) is available after the savings starter rate.

polymaff

Kenhere:

As you are obviously keen to get to the bottom of Income taxation, you might like to download SA110 which, on page TCSN3, lists the FIVE classes of income subject to Income Tax, together with sub-classes - and this is important - in the order in which liability to tax is computed.

It also suggests processes that you should follow. For once HMRC has pretty much followed the legislation, eventually (at Section 22) even using the same "steps" terminology as appears in the legislation. Wow!

I don't think that there is a version yet out for 2018/19 but this one is OK, so long as you tweak some of the parameters - particularly the Dividend Allownce, down from £5,000 to £2,000.

You'll notice that Personal Allowances don't get much of a mention. None at all until just at the end of Section 4. This is what I meant by new thinking.

This document is not perfect - but it might help. There's a cop-out at page TCSN 13 which could be paraphrased as "We're not quite sure if we're distributing your Personal Allowances correctly in our processes"

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/690409/sa110-Notes-2018.pdf

I'd suggest that the text is the most important thing to read through at first. The calculation processes look - and are - pretty daunting, but the important first stage is to get some of the logic into something you're happy to work with.

EDIT: And there is some logic behind it - really.

Kenhere

Thanks for the follow up Dazed and confused. Thanks for this link polymaff. Yes it's very comprehensive and does help with the step-by-step.

It looks like what was confusing me was this: The "Starting Rate" nil tax on interest the full £5,000 can only be claimed if other income is no greater than £11,850 (i.e. the Personal Allowance nil tax rate for tax).

So in my example where the spouse has:
BTL income £10,000
Interest £6,000
Dividends £5,000

For the purposes of the Starting Rate, other income means only the BTL £10,000 (the Dividends are excluded). So no tax will be paid on the interest (£5,000 Starting Rate + £1,000 Savings Allowance for Basic Rate tax payer). So that makes sense.

But what is confusing was that on Gov.UK page for "Tax on Dividends" with reference to the £2,000 nil-tax dividend allowance it says:

"Above this allowance the tax you pay depends on which Income Tax band you’re in. Add your income from dividends to your other taxable income when working this out."

This clearly infers that Dividend income is included in the income that determines whether you are in the Personal Allowance 0% Band, 20% Basic Rate, 40% Higher Rate, or 45% Advanced Rate for income tax.

So for the Income Tax Band calculation the £11,850 threshold includes dividend income, but for the Standard Rate full allowance £11,850 threshold - the same figure - it excludes dividend income. That inconsistency has me confused!

eskbanker

polymaff wrote: »

Any comments?

Sounds like a promising concept but I'm a great believer in pictures being worth a thousand words, so any chance of a here's-one-I-prepared-earlier worked example in its real visual format, which I suspect would really bring this to life?

polymaff

Go ahead. Third-party test is widely accepted as the best test of a process like this. The more unexpected challenges the more improved the next version will be.

eskbanker

polymaff wrote: »

Go ahead. Third-party test is widely accepted as the best test of a process like this. The more unexpected challenges the more improved the next version will be.

I wasn't volunteering, I was suggesting that people might get a better understanding of your Simple Visual Model if you showed a picture of what it actually looked like to illustrate the simplicity visually, otherwise it may come across as Quite A Complicated Description Of Something That Probably Looks Relatively Simple!

polymaff

Each of these models I've produced are meant to mentor, without too much maths, those keen to understand how Income Tax really works today. The way to prove something to yourself is to do it for yourself - and I hope that there are others who are bright and enthusiastic enough to take up that challenge.

Not to mention find errors in my logic.

Here is some 2018/19 test data:
BRB = £34,500
PA = £11,850
TaxableNonSavingsInc = £36,000
TaxableSavingsInc = £10,000
Dividend = £10,000

The old orthodoxy was that the TaxableNonSavingsInc would use up the entire PA. See how much the new orthodoxy - which recognises what has been there in the legislation for some time - yet unrecognised by HMRC and quite a lot of the accountancy profession - turns the old orthodoxy upside down - and saves a handy, round, sum.

EDIT: Typo 33500 -> 34500

dales1

That truly is an excellent demo.

(And it gives a nice round saving, as you say, as long as the typo for BRB is remedied to 34,500 (not 33,500)).

Well done !

Dales.

Dazed_and_confused

Going with the BRB of £33,500 is the magic number £100? Should be a liability of £9360 rather than £9460?

That's for a rest of the UK taxpayer. Will have a go at a Scottish taxpayer later

Kenhere

I have gone through the "new thinking" method. Is it available to test it in Excel or as a Google spreadsheet?

Before posting here I spent some time searching online for an Excel spreadsheet to calculate tax for people who are retired and/or whose income is more investment and savings like buy to let, share dealing, savings interest etc. But all I could find were targetted more at contractors and people in employment. And none were formatted so you could easily change the tax rates and thresholds to update as they change.

There is software for tax returns but this is not so much about doing a tax return as being able to play about with the income figures to try to find optimum values for different income types so for example spouses can adjust their asset shares optimally each financial year.

I don't suppose anyone knows if such an Excel doc is freely available anywhere?