how do Inland Revenue determine on whether to apply tax to dividend or interest?

wblann

I will be over the personal allowance by £1500 this year.  My income includes dividends (7000) and interest (3000), both of which are over the tax free limit for each.   It would be to my advantage if the considered the £1500 that is over the personal allowance to be Dividend payment vs Interest payments as dividend attract tax at 8.75% but interest at 20% -  but I cannot find out anywhere, how it is determined which rate would be applied or if there is a way that I can ensure it is the Dividend rate that is used, and therefore reduce the tax amount.  Any insight on this situation greatly appreciated. Thanks

Dazed_and_C0nfused

wblann said:

I will be over the personal allowance by £1500 this year.  My income includes dividends (7000) and interest (3000), both of which are over the tax free limit for each.   It would be to my advantage if the considered the £1500 that is over the personal allowance to be Dividend payment vs Interest payments as dividend attract tax at 8.75% but interest at 20% -  but I cannot find out anywhere, how it is determined which rate would be applied or if there is a way that I can ensure it is the Dividend rate that is used, and therefore reduce the tax amount.  Any insight on this situation greatly appreciated. Thanks

The only allowance you have is the Personal Allowance, any income above that will be taxed.

But there are 3 different tax rates of 0% which will help you here.

If we assume that you haven't applied for Marriage Allowance and the remaining income is non savings non dividend such as earnings or pension then you would be taxed like this,

Total taxable income £14,070
Less Personal Allowance £12,570
Income to be taxed £1,500

£1,500 x 0% = £0.00 (savings starter rate band)

As you will from the above you cannot (or do not need to) utilise either the savings nil rate band (aka Personal Savings Allowance) or the dividend nil rate band (aka Dividend Allowance).

uknick

With regard to your question regarding shares and interest; dividends come from a share holding, interest does not.

Why do you think it may be more complicated than that?

xylophone

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-dividends

Bookworm105

to answer your underlying question, primary legislation sets out a specific order in which income is totalled (1. earnings 2. interest 3. dividends) to establish which tax band applies to each source of income.
The jargon is "top slicing"
SAIM1090 - Savings and investment income: savings and dividend income is the highest part of total income - HMRC internal manual - GOV.UK (www.gov.uk)

Once that total is established, technically the taxpayer is entitled to "apply" their personal allowance in a manner which is most tax efficient for them. See Income Tax Act 2007 section 25

This example probably gives you the answer you are looking for (note it uses 19/20 figures!)
SAIM1110 - Savings and investment income: tax on savings and investment income: example for tax year 2019-20 - HMRC internal manual - GOV.UK (www.gov.uk)