How do dividends affect the rate bands for a chargeable gain on a bond

mfn123

This is related to the helpful forum thread Do dividends impact the starting rate for savings

Can anyone explain the rules for using the zero-rate Starting Rate for Savings (SRS) and Personal Savings Allowance (PSA) bands for a chargeable gain when there is also dividend income?

My interest in this is mostly curiosity - my mother-in-law receives state pension, savings interest, dividends, and some bond gain each year, and I'm trying to understand the HMRC online tax calculation on her 2024/25 self-assessment.

It said that her savings interest used (some of) her SRS ('starting rate'), and that the bond gain used (all of) her PSA ('basic rate band at nil rate'), but did not use any SRS. This does not matter at present because she is a basic rate payer (so any tax on the bond gain is matched by the credit), but I can imagine situations where the lack of SRS might increase her tax bill.

I used a spreadsheet from M&G to try out various numbers myself, but don't understand the results it produced. Why do dividends reduce the SRS but not the PSA available for bond gains?

For example (assuming other pension income uses exactly the full 12570 personal allowance):

Interest:5000; Bond gain:3500 - Interest uses full SRS; Bond uses full PSA
Interest:	SRS	5000	use full SRS
Bond gain:	PSA	1000	use full PSA (no SRS remaining)
	basic rate	2500	taxable @ 20% with 20% credit
Interest:5000; Dividends:3000; Bond gain:3500 - Interest uses full SRS; Bond uses full PSA
Interest:	SRS	5000	use full SRS
Dividends:	nil rate	500	use dividend allowance
	basic rate	2500	taxable @ 8.75%
Bond gain:	PSA	1000	use full PSA (no SRS remaining)
	basic rate	2500	taxable @ 20% with 20% credit
Interest:2000; Bond gain:3500 - Interest uses SRS; Bond uses remaining SRS and some PSA
Interest:	SRS	2000	use some SRS
Bond gain:	SRS	3000	use remaining SRS
	PSA	500	use some PSA
Interest:2000; Dividends:2500; Bond gain:3500 - Interest uses SRS; Bond uses full PSA but reduced SRS
Interest:	SRS	2000	use some SRS
Dividends:	nil rate	500	use dividend allowance
	basic rate	2000	taxable @ 8.75%
Bond gain:	SRS	500	use remaining SRS - but reduced?
	PSA	1000	use full PSA
	basic rate	2000	taxable at 20% with 20% credit
Interest:2000; Dividends:3000; Bond gain:3500 - Interest uses SRS; Bond uses full PSA but no SRS
Interest:	SRS	2000	use some SRS
Dividends:	nil rate	500	use dividend allowance
	basic rate	2500	taxable @ 8.75%
Bond gain:	PSA	1000	use full PSA - no SRS remaining?
	basic rate	2500	taxable @ 20% with 20% credit

It seems that dividends

• Do not reduce the SRS or PSA available for savings interest (as expected)
• Do not reduce the PSA available for bond gain. Why?
• Do reduce the SRS available for bond gain. Why?

Sorry if the above is a bit cryptic. Trying to explain gets a bit long-winded, but hopefully the explanation will be simple!

Thanks

mfn123

I received an email notification that @Nomunnofun1 had commented on this, but there was nothing here, so I'm pasting his/her comment in case it got lost by some technical glitch

Nomunnofun1 commented on How do dividends affect the rate bands for a chargeable gain on a bond
Gains on bonds (a chargeable event) have deemed income tax paid - it is not repayable. Accordingly I don’t see how PSA is relevant. 

Actually I think zero-rate bands such as SRS and PSA do reduce the overall tax bill if the credit can be used against other tax, such as on dividends. On the existing tax return using actual figures, the PSA reduced the bond gain by £1000, and the 'surplus' £200 bond credit effectively reduced the dividend tax by that amount. I would hope to get similar benefit from SRS, but it doesn't seem to work that way. Why?