Income Tax across Pension income and Dividends

tigerspill

Maybe this is a dumb question, but I am going to ask anyway.

If I have taxable income across two streams - pension income and dividends as follows -
Pension Income of £14,000
Dividends of £2,000.

The total taxable income is £16,000 so tax is obviously due.  If the tax free allowance is £12,570 - tax is due on the remaining £3,430.  But there is a £500 allowance on dividends.

However, I believe that these income streams are taxed at different rates - pension income at 20% and the dividends at 8.75%.

I am trying to understand how the tax is calculated?  Is is as follows -
Dividends - 8.75 % on £1,500 (£2,000 - £500 allowance)
Pension income - 20% on £1,430 (£14,000 - £12,570)

Thanks

Dazed_and_C0nfused

tigerspill said:

Maybe this is a dumb question, but I am going to ask anyway.

If I have taxable income across two streams - pension income and dividends as follows -
Pension Income of £14,000
Dividends of £2,000.

The total taxable income is £16,000 so tax is obviously due.  If the tax free allowance is £12,570 - tax is due on the remaining £3,430.  But there is a £500 allowance on dividends.

However, I believe that these income streams are taxed at different rates - pension income at 20% and the dividends at 8.75%.

I am trying to understand how the tax is calculated?  Is is as follows -
Dividends - 8.75 % on £1,500 (£2,000 - £500 allowance)
Pension income - 20% on £1,430 (£14,000 - £12,570)

Thanks

One small difference, albeit it doesn't change the income tax payable.  But could impact any CGT if that was relevant as you have used more basic rate band.

There is no "allowance" for dividends so the dividend income would be taxed like this,

£500 x 0% 
£1,500 x 8.75%

The above assumes you haven't applied for Marriage Allowance.

tigerspill

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

Dazed_and_C0nfused

tigerspill said:

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

The full basic rate band would be available for any Capital Gains.

Unused Personal Allowance cannot help with CGT though.

tigerspill

Dazed_and_C0nfused said:

tigerspill said:

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

The full basic rate band would be available for any Capital Gains.

Unused Personal Allowance cannot help with CGT though.

OK - there is a terminology here I don't understand - the difference between "unused Personal Allowance" - is this the standard £12,570 that we all start with before adjustments?  Could you help me out with how the first point regarding the full basic rate band helps with CGT?  Thanks again.

dunstonh

If I have taxable income across two streams - pension income and dividends as follows -

Pension Income of £14,000

Dividends of £2,000.
The total taxable income is £16,000 so tax is obviously due.  If the tax free allowance is £12,570 - tax is due on the remaining £3,430.  But there is a £500 allowance on dividends.

One assumes that the £14,000 is drawdown, annuity or scheme pension and not UFPLS? - if UFPLS, then no tax would be due.

However, I believe that these income streams are taxed at different rates - pension income at 20% and the dividends at 8.75%.

Or an effective rate of 15% on the pension if UFPLS used.

tigerspill

dunstonh said:

If I have taxable income across two streams - pension income and dividends as follows -

Pension Income of £14,000

Dividends of £2,000.
The total taxable income is £16,000 so tax is obviously due.  If the tax free allowance is £12,570 - tax is due on the remaining £3,430.  But there is a £500 allowance on dividends.

One assumes that the £14,000 is drawdown, annuity or scheme pension and not UFPLS? - if UFPLS, then no tax would be due.

However, I believe that these income streams are taxed at different rates - pension income at 20% and the dividends at 8.75%.

Or an effective rate of 15% on the pension if UFPLS used.

Thanks dunstonh.  
Yes, the pension is all taxable drawdown from a SIPP.  So not UFPLS as this was taken previously.

Dazed_and_C0nfused

tigerspill said:

Dazed_and_C0nfused said:

tigerspill said:

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

The full basic rate band would be available for any Capital Gains.

Unused Personal Allowance cannot help with CGT though.

OK - there is a terminology here I don't understand - the difference between "unused Personal Allowance" - is this the standard £12,570 that we all start with before adjustments?  Could you help me out with how the first point regarding the full basic rate band helps with CGT?  Thanks again.

Yes.  But it can only be "adjusted" in two situations,

1.  You have applied for Marriage Allowance (so £12,570 becomes £11,310)

2.  You have adjusted net income of £100,002 or more.  Once adjusted net income hits £100,002 you lose £1 of your Personal Allowance.  Eventually if your adjusted net income is large enough then it is tapered down to £0.

Capital Gains above your annual exempt amount (£3,000 at the moment I think) start being taxed using the standard basic income tax bands, so if you have used some of your basic rate band on your income then there is less available for Capital Gains.  Income taxed at 0% can use some of your basic rate band.

tigerspill

Dazed_and_C0nfused said:

tigerspill said:

Dazed_and_C0nfused said:

tigerspill said:

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

The full basic rate band would be available for any Capital Gains.

Unused Personal Allowance cannot help with CGT though.

OK - there is a terminology here I don't understand - the difference between "unused Personal Allowance" - is this the standard £12,570 that we all start with before adjustments?  Could you help me out with how the first point regarding the full basic rate band helps with CGT?  Thanks again.

Yes.  But it can only be "adjusted" in two situations,

1.  You have applied for Marriage Allowance (so £12,570 becomes £11,310)

2.  You have adjusted net income of £100,002 or more.  Once adjusted net income hits £100,002 you lose £1 of your Personal Allowance.  Eventually if your adjusted net income is large enough then it is tapered down to £0.

Capital Gains above your annual exempt amount (£3,000 at the moment I think) start being taxed using the standard basic income tax bands, so if you have used some of your basic rate band on your income then there is less available for Capital Gains.  Income taxed at 0% can use some of your basic rate band.

Thank you again!
So does this mean that If I don't use all of my £12,570 income tax 0% allowance, I can use any remainder against CGT?

Dazed_and_C0nfused

tigerspill said:

Dazed_and_C0nfused said:

tigerspill said:

Dazed_and_C0nfused said:

tigerspill said:

Thank you for the clarification.
However, you do raise another important facet regarding CGT.  This is a further complexity I need to understand next.
If the income is less than the £12,570 and no tax is payable, how does this affect CGT if assets are sold with gains?  
The reason I ask is that we do have control over how much pension is withdrawn.  It is this we are trying to work out - how much is best to withdraw.

The full basic rate band would be available for any Capital Gains.

Unused Personal Allowance cannot help with CGT though.

OK - there is a terminology here I don't understand - the difference between "unused Personal Allowance" - is this the standard £12,570 that we all start with before adjustments?  Could you help me out with how the first point regarding the full basic rate band helps with CGT?  Thanks again.

Yes.  But it can only be "adjusted" in two situations,

1.  You have applied for Marriage Allowance (so £12,570 becomes £11,310)

2.  You have adjusted net income of £100,002 or more.  Once adjusted net income hits £100,002 you lose £1 of your Personal Allowance.  Eventually if your adjusted net income is large enough then it is tapered down to £0.

Capital Gains above your annual exempt amount (£3,000 at the moment I think) start being taxed using the standard basic income tax bands, so if you have used some of your basic rate band on your income then there is less available for Capital Gains.  Income taxed at 0% can use some of your basic rate band.

Thank you again!
So does this mean that If I don't use all of my £12,570 income tax 0% allowance, I can use any remainder against CGT?

Assuming you referring to the Personal Allowance and not any of the three 0% tax bands then no.