Tax on Income + Savings Interest + Dividends

Dazed_and_C0nfused

unholyangel said:

Dazed_and_C0nfused said:

You can't use the £500 unused PSA to offset the dividend income.

True but I think you are missing the point.  If you allocate the Personal Allowance like shown below what income is left to be taxed?

£6,000 Pension
£6,000 Interest
£500 Dividends

I think you were right the first time. Personall allowance is deducted at step 3. Starter savings rate is a rate at which it is charged under chapter 2, which doesn't come in until step 4. 

Which means personal allowance split of £6000 pension, £6500 interest and £0 dividend. 

Have a look at the Prudentials seven steps to calculate an individual's income tax liability. 

You use the Personal Allowance at step 3.  However you think it is most beneficial.

Then you have to tax the remaining income in a strict order. So if the Personal Allowance has reduced the pension income to zero the first thing which gets taxed is savings interest.  Which has £6,000 available to be taxed at 0%.

Finally the £2,500 dividends get taxed.

xylophone

I think you were right the first time. Personall allowance is deducted at step 3. Starter savings rate is a rate at which it is charged under chapter 2, which doesn't come in until step 4. 

It is the allocation of the Personal Allowance to the best advantage of the individual which makes the difference.
Allocate £6000 to pension, £6000 to savings and  £500 to dividends.
Then £6000 of savings benefits from 0% band (£5000) and PSA  £1000.
Leaving dividends of £2500 to benefit from 0% tax on £2000 and 7.5% on £500.

RG2015

Gatser said:

My calculations are:
Personal Allowance 12500 less Pension 6000 = 6500 allowance remaining
Savings Int 12000 less Starting Rate 5000 less Personal Savings Allowance 1000 = 6000
Then Allowance 6500 less Net Savings Interest 6000 = 500 allowance remaining
Dividends 3000 less 2000 divds allowance = 1000 less 500 allowance remaining = 500
500 x 7.5% = £37.50 Tax Due
I agree with your calc Dazed and COnfused…. hope we are correct!
Thanks for your help....

I notice that you have completely amended this post (post #5). It does now show the likely correct position but it somewhat distorts the continuity of the thread.

That said this is a very useful thread and I am grateful to you for starting it.

[Deleted User]

https://www.barnesroffe.com/allocation-personal-allowance/
In the link as given by Xylophone, I'm not sure if the calculation given in Example 2 is correct. (using new allocation)  It shows an income of 8500 and interest income of 6500.  After deducting the 500 PA and the PSA of 1000 leaving a taxable income of 5000, it then states that this amount can be offset against the 5000 starting rate.  But I think the starting rate left to be offset should be 2500 not the full 5000.  ie 8500+6500 -17500.

I'd be grateful if someone can check this out for me and confirm.
Having thought about it more carefully, I worked out where I was getting the whole thing confused.  Please ignore 

Dazed_and_C0nfused

But I think the starting rate left to be offset should be 2500 not the full 5000.  ie 8500+6500 -17500.

Why do you think that?

The starting rate is part of the basic rate band.

How much of the basic rate band has been used by the point the savings interest (net of the Personal Allowance) needs to be taxed?