Tax on non ISA investments

xylophone

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

For a more detailed look at the PSA see our factsheet 'Savings and dividend tax' which also includes examples of how savings income within the PSA uses up the rate bands and how the PSA interacts with the dividend allowance.

You might find the above factsheet of use.

Tom99

xylophone wrote: »

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

For a more detailed look at the PSA see our factsheet 'Savings and dividend tax' which also includes examples of how savings income within the PSA uses up the rate bands and how the PSA interacts with the dividend allowance.

You might find the above factsheet of use.

Yes very useful, particularly this bit:


'Please note that income that is within your dividend allowance is counted as taxable income (albeit taxable at 0%) and so counts towards your basic or higher rate limits and may therefore affect the amount of PSA that you are entitled to and the rate of tax you pay on dividend income that exceeds your allowance'

The 20% tax limit this year is £46,350 so if I had say earnings of £43,350, interest of £1,000 and dividends of £2,000 I would not pay any tax on the savings and dividend?
But if dividends were £2,001 I would then be a higher rate taxpayer? and pay tax at 40% on £500 of the interest and at 32.5% on £1 of the dividend?
Is that correct?

short_butt_sweet

Tom99 wrote: »

The 20% tax limit this year is £46,350 so if I had say earnings of £43,350, interest of £1,000 and dividends of £2,000 I would not pay any tax on the savings and dividend?

yes.

But if dividends were £2,001 I would then be a higher rate taxpayer? and pay tax at 40% on £500 of the interest

you'd pay 20% on £500 of interest. because only £1 of your income is in the higher-rate band (and that is £1 of dividends).

and at 32.5% on £1 of the dividend?
Is that correct?

this is where it gets complicated. ... you have assumed that your £11,850 personal allowance is set against part of your earnings. but in fact the personal allowance should be set against whatever makes your income tax bill the lowest. which in this case is against £11,849 of earnings and £1 of dividends. which has the effect that you are paying 20% on £1 more of earnings than you would be without the extra £1 of dividends (i.e. 20% on £31,501, instead of 20% on £31,500). the tax on dividends themselves is £0, because £1 of dividends are covered by the personal allowance and the remaining £2,000 are covered by the "dividend allowance" (really a 0% band). that is £1,999 of dividends that fall within the basic-rate band, and £1 that falls within higher-rate, but both taxed at 0%.

Tom99

short_butt_sweet wrote: »

yes.
you'd pay 20% on £500 of interest. because only £1 of your income is in the higher-rate band (and that is £1 of dividends).
this is where it gets complicated. ... you have assumed that your £11,850 personal allowance is set against part of your earnings. but in fact the personal allowance should be set against whatever makes your income tax bill the lowest. which in this case is against £11,849 of earnings and £1 of dividends. which has the effect that you are paying 20% on £1 more of earnings than you would be without the extra £1 of dividends (i.e. 20% on £31,501, instead of 20% on £31,500). the tax on dividends themselves is £0, because £1 of dividends are covered by the personal allowance and the remaining £2,000 are covered by the "dividend allowance" (really a 0% band). that is £1,999 of dividends that fall within the basic-rate band, and £1 that falls within higher-rate, but both taxed at 0%.

Yes it is certainly complicated but you have lost me with that calculation. Surely if I used £1 of the £11,850 allowance for the last £1 of dividend income and saved 32.5p I would push £1 of interest into the 40p bracket?

short_butt_sweet

Tom99 wrote: »

Yes it is certainly complicated but you have lost me with that calculation. Surely if I used £1 of the £11,850 allowance for the last £1 of dividend income and saved 32.5p I would push £1 of interest into the 40p bracket?

after you've applied the personal allowance, you must take the remaining income in the "order of taxation", which is:

1) non-savings income (which means everything other than interest or dividends, so including earnings)
2) savings income (i.e. interest)
3) dividends

so that gives you, within the £34,500 basic-rate band:
first, £31,501 of earnings, taxed at 20%;
next, £500 of interest, taxed at 0% (because of the "personal savings allowance");
then, £500 of interest, taxed at 20%;
and finally, £1,999 of dividends, taxed at 0% (because of the "dividend allowance").

and then, within the higher-rate band, you have:
£1 of dividends, taxed at 0% (because of the "dividend allowance").

Tom99

short_butt_sweet wrote: »

after you've applied the personal allowance, you must take the remaining income in the "order of taxation", which is:

1) non-savings income (which means everything other than interest or dividends, so including earnings)
2) savings income (i.e. interest)
3) dividends

so that gives you, within the £34,500 basic-rate band:
first, £31,501 of earnings, taxed at 20%;
next, £500 of interest, taxed at 0% (because of the "personal savings allowance");
then, £500 of interest, taxed at 20%;
and finally, £1,999 of dividends, taxed at 0% (because of the "dividend allowance").

and then, within the higher-rate band, you have:
£1 of dividends, taxed at 0% (because of the "dividend allowance").

Sorry you have still lost me. Say I had £43,350 earnings, £1,000 interest and £2,500 dividend. Would the additional £500 dividend still be effectively taxed at 20% rather than 32.5%?

short_butt_sweet

Tom99 wrote: »

Sorry you have still lost me. Say I had £43,350 earnings, £1,000 interest and £2,500 dividend. Would the additional £500 dividend still be effectively taxed at 20% rather than 32.5%?

yes. because in this case, you'd set the personal allowance against £11,350 of earnings and £500 of dividends. so an extra £500 of dividends is effectively being taxed at 20% (plus a £100 "penalty" for the personal savings allowance being reduced from £1000 to £500).

talexuser

But would HMRC automatically calculate it this way on PAYE, or would you have to tell them the way you want income split into the personal allowance?

londoninvestor

talexuser wrote: »

But would HMRC automatically calculate it this way on PAYE, or would you have to tell them the way you want income split into the personal allowance?

Unless HMRC have made the Self Assessment software smarter in the last few months, you'll need to tell them. See the examples on pages 14-16 here.

short_butt_sweet

PAYE and self-assessment are different things.

HMRC's self-assessment software has been attempting to allocate the personal allowance in the correct way (it is not something for which the taxpayer is supposed to make an "election"). but (as londoninvestor's link mentions) there have been errors in their software in certain cases (though not in all cases in which the personal allowance should be allocated in a non-standard way). there was some suggestion that taxpayers affected by those cases should submit returns on paper instead of online (though i can't claim to understand why that should help).

PAYE is just a system for attempting to collect the correct tax at source, not an exact calculation of tax due. so it may require correction later on (either via one-off payment/repayment, or by adjusting a later year's tax code). i don't know how clever they are trying to be about this stuff when generating PAYE codes (never mind how clever they are succeeding in being).