Taxation of savings interest and dividends with other income just below the higher rate threshold.

Somerset_Alan

I know that in the simple case, a standard rate taxpayer will have a £1,000 PSA to be deducted from savings interest before calculating tax on the rest; and a higher rate taxpayer will have a PSA of £500.  The problem I have is in trying to understand what happens, if the interest (before applying the PSA) would take the income just over the threshold - does this then reduce the PSA to £500?

I can't find any detailed description of the calculation for "edge cases".  Such as: Earned income £45,000, Interest on savings £6,000.  Is the Personal Savings Allowance £1,000 or £500?  Because if the PSA of £1,000 is deducted from the total income (£45,000+£6,000-£1000 = £50,000) the total remains under the Higher Rate threshold.  But if the relevant band is identified before applying any allowance, the total income (£45,000+£6,000 = £51,000) is in the Higher Rate band, making the PSA £500, and after deduction of the PSA the total (£45,000+£6,000-£500 = £50,500) remains in the Higher Rate band.  So both methods are self-consistent, but they result in different tax liabilities.

And similarly for Dividend income, where the tax rate applied to the dividend income depends whether the total income is above the Higher Rate threshold. If the Dividend Allowance is deducted from total income *before* checking the band, it can result in a lower tax liability than if it is applied *after* comparing the total income with the threshold.

And most complicated of all, what happens if there are both savings interest and dividend income which exceed the allowances?

Isthisforreal99

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Somerset_Alan

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Isthisforreal99

Somerset_Alan said:

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Only on the amount over the higher rate threshold, the 8.75% would be charged up to the threshold.

Somerset_Alan

Isthisforreal99 said:

Somerset_Alan said:

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Only on the amount over the higher rate threshold, the 8.75% would be charged up to the threshold.

Thanks again.  And (last question, I think!) does dividend income get added to earned income and savings interest for the purposes of determining the applicable amount of the PSA?  Or are dividends considered entirely separate?  

eskbanker

Somerset_Alan said:

Isthisforreal99 said:

Somerset_Alan said:

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Only on the amount over the higher rate threshold, the 8.75% would be charged up to the threshold.

Thanks again.  And (last question, I think!) does dividend income get added to earned income and savings interest for the purposes of determining the applicable amount of the PSA?  Or are dividends considered entirely separate?  

PSA is set according to total taxable income, i.e. including dividends as well as savings, even if some of that income may be taxed at 0%.

FrugaiMacDugal

Salary, interest, dividends are all income just add the lot together for a total.

Try this wee gadget with different figures.

Somerset_Alan

eskbanker said:

Somerset_Alan said:

Isthisforreal99 said:

Somerset_Alan said:

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Only on the amount over the higher rate threshold, the 8.75% would be charged up to the threshold.

Thanks again.  And (last question, I think!) does dividend income get added to earned income and savings interest for the purposes of determining the applicable amount of the PSA?  Or are dividends considered entirely separate?  

PSA is set according to total taxable income, i.e. including dividends as well as savings, even if some of that income may be taxed at 0%.

- and some of it may be taxed at 8.75% or 33.75%, if I've understood what the helpful commenters have written.

Somerset_Alan

FrugaiMacDugal said:

Salary, interest, dividends are all income just add the lot together for a total.

Try this wee gadget with different figures.

Doh.  I did try that calculator before, but didn't realise that I could add dividend income.  Thanks.

kimwp

Somerset_Alan said:

eskbanker said:

Somerset_Alan said:

Isthisforreal99 said:

Somerset_Alan said:

Isthisforreal99 said:

With salary of £45k and interest of £6k your taxable income is £51k and therefore a higher rate taxpayer so PSA is £500. The PSA is not an allowance to be deducted from taxable income, it is a 0% rate band

Thank you.  Does the same principle apply if the £6k was dividends rather than interest?  That is, does the dividend income make one a higher rate taxpayer, so that the applicable tax (after the £500 zero rate band for dividends) is 33.75% instead of 8.75%?

Only on the amount over the higher rate threshold, the 8.75% would be charged up to the threshold.

Thanks again.  And (last question, I think!) does dividend income get added to earned income and savings interest for the purposes of determining the applicable amount of the PSA?  Or are dividends considered entirely separate?  

PSA is set according to total taxable income, i.e. including dividends as well as savings, even if some of that income may be taxed at 0%.

- and some of it may be taxed at 8.75% or 33.75%, if I've understood what the helpful commenters have written.

Same for savings interest afaik. So if your savings interest takes you over the threshold, then you only have the £500 allowance. But anything over that £500 will be taxed at the rate applicable to where it falls relative to the threshold (the marginal rate)

So 45k pay + 5k savings interest: £500 of the interest will have 0% tax, some 20%, some 40%

Newly_retired

So it is possible to actually be worse off if savings interest pushes me just into the 40% band as my PSA is reduced to £500.  Maybe I shouldn't always be looking for the highest rates?
Though I can mitigate this by Gift Aiding.