Taxing savings or selling funds?

talexuser

Basically asking if my logic here is correct.
You are a higher rate taxpayer with income and savings interest below the 40% threshold and dividends above the 40% threshold.
Savings interest is taxed before dividends.
Savings interest above the 0% allowance will attract a tax rate of 20% until they (with income) reach the higher rate threshold. Assume they don't.
Conversely CGT selling funds will also be taxed at 20% beyond the 6k (this year) allowance since a higher rate taxpayer.
However savings interest is worse from a tax point of view because the extra interest, even if only taxed at 20% pushes the total income higher and more of the existing dividends will be taxed at 33.75%.
So purely from a tax point of view it is better to minimise savings interest to the 0% allowance band and add extra income to the GIA and pay CTG as and when necessary? Assume ISA and SIPP maxed out and out of the equation.
Where is the catch - ignoring investment risk?
I suppose putting extra into the GIA will increase dividends taxed at 33.75 anyway, so you can't win?

ColdIron

If you've paid the most into your pensions have you remembered to factor in that the higher rate threshold will rise from £50,270? You may have less higher rate liability than you think

talexuser

Good point, I can only pay max of 3600 into the SIPP since already drawing a final salary scheme, so that's the max the 40% threshold can gain.

Swipe

33.75% tax on dividends is a sure way to force me to pay as much as I can into my pension to keep me below the threshold.

ColdIron

talexuser said:

Conversely CGT selling funds will also be taxed at 20% beyond the 6k (this year) allowance since a higher rate taxpayer.

Let's leave CGT out of it for a moment, it doesn't affect the interest/dividends equation

So purely from a tax point of view it is better to minimise savings interest to the 0% allowance band and add extra income to the GIA

It's always better to minimise savings interest to 0% but I don't think it's relevant to your question which seems to be:
Is it better (in my particular circumstances above) to move money from interest to dividends?

Yes it is

I suppose putting extra into the GIA will increase dividends taxed at 33.75 anyway

No it won't, they will be the same

If we assume the return from interest and dividends is broadly the same and you remove a lump of interest producing cash (at 20%) and replace it with dividend producing investments (at 8.75%) it doesn't alter the amount above the HRT threshold

But 8.75% is less than 20% so you pay less tax

Back to CGT. It's always nice to have an extra allowance to take advantage of. CGT is largely an elective tax, you can control the sales and therefore how much tax you pay. You could choose growth investments rather than higher dividend ones and reduce your dividend tax further, replacing them with capital gains (which you won't pay tax on)

All of  this 'ignoring investment risk' of course

talexuser

Yes, but I'm already paying 33.75% tax on dividends, so interest increases "down the income + savings scale" pushes dividends at the top of the scale further into the 33.75 area, and less in the 8.75 area, if that makes sense?

I did some calculatons with interest at £500, £1000, £2000 etc and was surprised the tax increase did not work out at 20% of the excess of interest but actually more.... which turned out to be "constant" dividends being taxed less at 8.75 and more at 33.75 as the gross increased intot he 40% tax area..

ColdIron

You have interest and some dividends below £50,270 (20% and 8.75%) and some dividends above it (33.75%)

If you swap some of that interest for dividends (by putting it into a GIA) you will pay 8.75% on that sum instead of 20%. Your interest/dividend mix won't change the HRT threshold so the dividends above it are unchanged

ColdIron

Try this

Now move £10,000 from savings to investments

-

Less interest at 20%, more dividends at 8.75%, same dividends at 33.75% = less tax

talexuser

If I put your example figures into my tax spreadsheet I get £625 less tax with the 10,000 from savings to investments which proves your point, even if the savings interest of 21700 is a little on the high side :-)
I think I was increasing the savings interest and seeing an increase in the 33.75 band without trying the equivalent amounts as dividends and comparing the final amounts.

In any case with increased savings rates and decreasing (by inflation) allowances it will be difficult to maintain a float for emergencies without paying more tax nowadays and in the foreseeable future, but an interesting exercise to see if minimising tax is practical at all.

Dazed_and_C0nfused

ColdIron said:

Try this

Now move £10,000 from savings to investments

-

Less interest at 20%, more dividends at 8.75%, same dividends at 33.75% = less tax

There is no "allowance" for dividends in the way you've shown it.

In the first table the first £1,000 of dividend income would be taxed at 0% (dividend nil rate band) and use up £1,000 of the basic rate band leaving just £9,000 available for dividends to be taxed at the dividend basic rate.

ColdIron

How did I not know, when constructing the tables, that this was coming (again)