Do dividends impact the starting rate for savings?

Notepad_Phil

Suppose a person was in receipt of £12,570 of taxable pension income, £1,000 of dividends and £6,000 of savings interest (both dividends and interest coming from taxable accounts): would they receive the full £5,000 starting rate for savings and so would just have £500 of the dividends being taxable, or do the dividends get added onto the pension income and thereby reduces the available starting rate and hence also bringing in additional taxation on some of the savings?

Before looking into this I thought that surely dividends would get added on, but it seems that is not actually correct, so I just wanted to get confirmation from the MSE collective that it is the case that in my example only the pension income impacts on the starting rate and so just some of the dividends will end up being taxed.

Many thanks.

Dazed_and_C0nfused

All the dividend income is taxable and would all be taxed.  

£500 at 0% and £500 at 8.75%.

Notepad_Phil

Dazed_and_C0nfused said:

All the dividend income is taxable and would all be taxed.  

£500 at 0% and £500 at 8.75%.

Many thanks. Yes an important point. So for the example given above, that's no tax on the savings as it's covered by the starting rate for savings and the Personal Savings Allowance, no tax on the pension income as it's covered by their Personal Allowance, but £43.75 of tax for the £500 of dividends not covered by the dividend allowance at a rate of 8.75% for a basic rate tax payer.

Bookworm105

technically it might be worth you understanding that "income" is ranked in a set order established by statute law.
That order defines what is the "top slice" of income facing taxation.

As others have already explained, "savings" income is looked at before dividend income so the various thresholds applicable to interest are applied before the dividends thresholds are applied to the dividends 

The order is defined in the Income Tax Act 2007 section 16

• If a person has savings income but no dividend income, the savings income is treated as the highest part of total income.
  
  
• If a person has dividend income but no savings income, the dividend income is treated as the highest part of total income.
  
  
• If a person has both savings and dividend income, the amounts taken together are treated as the highest part of total income, and the dividend income is taken as the higher part of the combined amount.
  

DRS1

Various sites on the web say it is only non savings non dividend income which eats away at the starting rate for savings.  MSE suggests it is just pension or wages.  The Gov.UK site says other income (eg wages or pension) but I assume there must be something more specific somewhere which supports the non savings non dividend interpretation.  One site suggested it was because dividends are taxed after savings but ????

Bookworm105

DRS1 said:

 One site suggested it was because dividends are taxed after savings but ????

one site is correct then as per the link to statute law 

DRS1

Bookworm105 said:

DRS1 said:

 One site suggested it was because dividends are taxed after savings but ????

one site is correct then as per the link to statute law 

OK.  I had expected the legislation to have something specific about how the £5000 is reduced.  It wasn't clear to me how section 16 would be relevant but I see now that it is specifically referred to in section 12(5).

So I could in theory have dividend income of £200K and if I have no other income apart from £5K of savings interest I would pay 0% income tax on the savings interest?

Just a theoretical question.

TheGreenFrog

DRS1 said:

Bookworm105 said:

DRS1 said:

 One site suggested it was because dividends are taxed after savings but ????

one site is correct then as per the link to statute law 

OK.  I had expected the legislation to have something specific about how the £5000 is reduced.  It wasn't clear to me how section 16 would be relevant but I see now that it is specifically referred to in section 12(5).

So I could in theory have dividend income of £200K and if I have no other income apart from £5K of savings interest I would pay 0% income tax on the savings interest?

Just a theoretical question.

Same result though if you had £205k of interest and no dividends.  But in both cases you are in effect paying some tax on the £5k because that £5k, although not taxed, does count for calculating tax bands. In effect, if you are a higher rate tax payer the allowance only saves you tax at the basic rate, not the higher rate.

itwasntme001

Have the same question as the OP.  I understand that dividends do NOT count as income when working out how much starter savings allowance one has (income over the personal allowance reduces it £ for £)?  Is that correct?

Whereas rental income and earned income do count?

Dazed_and_C0nfused

itwasntme001 said:

Have the same question as the OP.  I understand that dividends do NOT count as income when working out how much starter savings allowance one has (income over the personal allowance reduces it £ for £)?  Is that correct?

Whereas rental income and earned income do count?

There is a clear answer here.  From a reputable source.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-savings-income/starting-rate-savings

Remember though for people with high adjusted net income (>£100k) dividends could reduce your Personal Allowance, which would be relevant.