starting rate for savings

julie27fred

if you earn below £12,570. Will any interest from savings use the rest of my personal allowance. I have dividends outside an ISA wrapper, so I assume if my allowance is used by savings interest. I will only be eligible for £1000 tax free on my dividends. Or does the starting rate for savings cover the savings interest, rather than using any remaining Personal allowance

Dazed_and_C0nfused

Savings income uses things in this order,

Spare Personal Allowance

Savings starter rate band

Savings nil rate band (aka Personal Savings Allowance)

Band7

Dividend allowance is separate from savings interest allowance https://www.gov.uk/tax-on-dividends

Swipe

julie27fred said:

if you earn below £12,570. Will any interest from savings use the rest of my personal allowance. I have dividends outside an ISA wrapper, so I assume if my allowance is used by savings interest. I will only be eligible for £1000 tax free on my dividends. Or does the starting rate for savings cover the savings interest, rather than using any remaining Personal allowance

I thought it was £2000 until 6th April?

AndyTh_2

Dazed_and_C0nfused said:

Savings income uses things in this order,

Spare Personal Allowance

Savings starter rate band

Savings nil rate band (aka Personal Savings Allowance)

and dividend allowance starts after Personal Allowance, and dividends are considered in tax bandings after savings have been taken into account.

EthicsGradient

The order it's worked out in is done to be the best for you. So, for instance, if you have, next tax year, £11,000 earned income, £4,000 savings income, and £2,100 dividend income, it will be split as:
£11,000 of personal allowance used for earned income
£1,000 of dividend nil rate band used for dividend income
£1,100 of personal allowance used for dividend income
£470 remaining personal allowance used for savings income
£3,530 of starter rate used for remaining savings income
and you'd pay no tax. ie if it's better for you to have the personal allowance used for dividends rather than for savings, they will do that.

AndyTh_2

EthicsGradient said:

The order it's worked out in is done to be the best for you. So, for instance, if you have, next tax year, £11,000 earned income, £4,000 savings income, and £2,100 dividend income, it will be split as:
£11,000 of personal allowance used for earned income
£1,000 of dividend nil rate band used for dividend income
£1,100 of personal allowance used for dividend income
£470 remaining personal allowance used for savings income
£3,530 of starter rate used for remaining savings income
and you'd pay no tax. ie if it's better for you to have the personal allowance used for dividends rather than for savings, they will do that.

dividends come after savings interest in order of banding, so none of it would be under personal allowance in your example. The savings interest would use up the remainder of the personal allowance.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

If it's a special case for personal allowance, I can't find it.

spider42

AndyTh_2 said:

dividends come after savings interest in order of banding, so none of it would be under personal allowance in your example. The savings interest would use up the remainder of the personal allowance.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

If it's a special case for personal allowance, I can't find it.

EthicsGradient is correct. The Personal Allowance is allocated against the various types of income in the way that achieves the greatest reduction in the tax liability (Section 25 Income Tax Act 2007). So sometimes it will be beneficial to use some of it against dividends rather than interest.

EthicsGradient

spider42 said:

AndyTh_2 said:

dividends come after savings interest in order of banding, so none of it would be under personal allowance in your example. The savings interest would use up the remainder of the personal allowance.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

If it's a special case for personal allowance, I can't find it.

EthicsGradient is correct. The Personal Allowance is allocated against the various types of income in the way that achieves the greatest reduction in the tax liability (Section 25 Income Tax Act 2007). So sometimes it will be beneficial to use some of it against dividends rather than interest.

And I have had my own tax worked out this way by HMRC.

(Not sure if the formatting of the quotes above will show OK)

Dazed_and_C0nfused

AndyTh_2 said:

EthicsGradient said:

The order it's worked out in is done to be the best for you. So, for instance, if you have, next tax year, £11,000 earned income, £4,000 savings income, and £2,100 dividend income, it will be split as:
£11,000 of personal allowance used for earned income
£1,000 of dividend nil rate band used for dividend income
£1,100 of personal allowance used for dividend income
£470 remaining personal allowance used for savings income
£3,530 of starter rate used for remaining savings income
and you'd pay no tax. ie if it's better for you to have the personal allowance used for dividends rather than for savings, they will do that.

dividends come after savings interest in order of banding, so none of it would be under personal allowance in your example. The savings interest would use up the remainder of the personal allowance.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

If it's a special case for personal allowance, I can't find it.

That is true but only after the Personal Allowance has been allocated.

The Personal Allowance can be allocated in whichever ways gives the lowest liability.

In this scenario it's better to allocate some to the dividend income even though that means some of the interest then gets taxed (at 0%).

AmityNeon

AndyTh_2 said:

EthicsGradient said:

The order it's worked out in is done to be the best for you. So, for instance, if you have, next tax year, £11,000 earned income, £4,000 savings income, and £2,100 dividend income, it will be split as:
£11,000 of personal allowance used for earned income
£1,000 of dividend nil rate band used for dividend income
£1,100 of personal allowance used for dividend income
£470 remaining personal allowance used for savings income
£3,530 of starter rate used for remaining savings income
and you'd pay no tax. ie if it's better for you to have the personal allowance used for dividends rather than for savings, they will do that.

dividends come after savings interest in order of banding, so none of it would be under personal allowance in your example. The savings interest would use up the remainder of the personal allowance.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

If it's a special case for personal allowance, I can't find it.

s25(2) ITA 2007

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim1110