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Trying to understand the new Savings Allowance & the 5K Dividend Allowance

edited 30 November -1 at 1:00AM in Savings & Investments
32 replies 6.3K views
dgafdgaf Forumite
37 posts
edited 30 November -1 at 1:00AM in Savings & Investments
I am trying to find out if my income from savings and dividends will be taxed in 2016/17.

I do not currently have any income from employment/pension so am I right in my thinking here:

Personal Allowance - 11000
Personal Savings allowance - 1000

Will I be able to earn up to 12K in savings interest and up to 5K dividends tax free?

Also reading some of the threads on here I have seen another 0% Starting Rate for Savings of 5K - not sure how that works or if it applies to me?

If I don't use up the 12k for my savings interest can I use the remainder up for dividends or is the tax free dividend allowance fixed at £5K (even though in my case the 12k tax free allowance wont all be used up in savings interest?


Thanks in advance for your help.
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Replies

  • kidmugsykidmugsy Forumite
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    Until someone who is expert comes along, here's my understanding. I am entirely open to correction.
    dgaf wrote: »
    ... in 2016/17.
    I do not currently have any income from employment/pension so am I right in my thinking here:

    Personal Allowance - 11000
    Personal Savings allowance - 1000

    Will I be able to earn up to 12K in savings interest and up to 5K dividends tax free?

    So I understand. I must say, if you can earn £12k in interest I take my hat off to you.
    dgaf wrote: »
    Also reading some of the threads on here I have seen another 0% Starting Rate for Savings of 5K - not sure how that works or if it applies to me?

    I understand that it's for people on low incomes. I suppose if your income is the £17k you refer to above then you won't be entitled to it.
    dgaf wrote: »
    If I don't use up the 12k for my savings interest can I use the remainder up for dividends or is the tax free dividend allowance fixed at £5K (even though in my case the 12k tax free allowance wont all be used up in savings interest?

    I believe you will be able to use any otherwise unused part of your £11k Personal Allowance for tax-free dividend income. In other words if you made £16k in dividends and £1k in interest, you would have no income tax to pay.

    I do know that the dividend and interest allowances are not allowances in the same sense as the Personal Allowance is for most of us. They are, rather, 0% tax bands. I must say I wish I were reasonably certain of all this. It disappoints me that nobody in the newspapers has explained it to me yet.
    Free the dunston one next time too.
  • edited 1 April 2016 at 4:57AM
    Eco_MiserEco_Miser Forumite
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    edited 1 April 2016 at 4:57AM
    You can have up to £5k dividends plus £6k interest, plus £11k income from any source tax free, plus unlimited income and capital gains with ISAs.
    ETA: However the £11k Personal Allowance is taken first, and interest is allowed against this before dividends, allowing £16k of tax-free dividends only if that is your only income.
    So £6k interest and £16k dividends is possible.

    If your non-dividend, non-savings income exceeds £11k, the £5000 0% Starting Rate reduces pound for pound, giving an effective marginal rate of 40%.

    That's my understanding. It's possible that dividend income is included in the £17k limit as well.

    Kidmugsy, for this purpose £17k counts (just) as a low income.
    Eco Miser
    Saving money for well over half a century

  • dgafdgaf Forumite
    37 posts
    kidmugsy wrote: »
    I must say, if you can earn £12k in interest I take my hat off to you.

    Got several fixed rate bonds (on slightly better rates than available now) and got most of the high interest paying current accounts, reg savers.

    It would have been higher but luckily the interest from my cash Isa ~£4K pa (again its fixed on old rate of 5%) or dividends from S&S Isa are tax free.
    I understand that it's for people on low incomes. I suppose if your income is the £17k you refer to above then you won't be entitled to it.

    This is what I am trying to understand a little better (as I don't have any non-savings taxable income), I saw this on another thread on MSE:
    The 0% band for 2015/16 & 2016/17 is £5,000. It is restricted by non- savings taxable income (ignoring dividends) so that none of the band will be available if that income is above their personal allowance (& blind person’s allowance if claimed) plus the £5,000 starting rate.

    http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/
  • edited 1 April 2016 at 1:36AM
    dgafdgaf Forumite
    37 posts
    edited 1 April 2016 at 1:36AM
    Eco_Miser wrote: »
    You can have up to £5k dividends plus £6k interest, plus £11k income from any source tax free, plus unlimited income and capital gains with ISAs. So £6k interest and £16k dividends is possible.

    The bit in your reply above - can this £11K be used on dividends or interest even if I have already used up the £5K dividend allowance?
    If your non-dividend, non-savings income exceeds £11k, the £5000 0% Starting Rate reduces pound for pound, giving an effective marginal rate of 40%.

    My only income now is what I receive from savings interest and dividends.

    I am just trying to work out what will be best next FY, using the allowance for dividends (from my shares outside the ISA) or the interest on my savings.
  • you could have up to £17,000 interest + £5,000 dividends tax-free. (the interest is covered by £11,000 personal allowance + £5,000 zero-rate band + £1,000 PSA. and the dividends are covered by the £5,000 dividend allowance.)

    if you have between £11,000 and £17,000 interest, then only the first £5,000 of dividends are tax-free, and you pay tax on any dividends over that.

    if you have less than £11,000 interest, then you can get more than £5,000 dividends tax-free. in this case, a total of £16,000 is tax-free; e.g. if you have £9,000 interest, then the first £7,000 of dividends are tax-free.

    why so?

    interest is treated as a lower slice of income than dividends. the lowest £11,000 of income is set against your personal allowance; you don't have the option of setting it against any other allowance/band. so the personal allowance is set against interest, not against dividends, unless you have less than £11,000 interest.

    for income over the personal allowance, you can use other allowances/bands. for interest, that means the zero-rate band (for the £11,000-£16,000 band of income) and the £1,000 PSA (for anywhere within the basic rate band). for dividends, that means the £5,000 dividend allowance.
  • edited 1 April 2016 at 5:19AM
    Eco_MiserEco_Miser Forumite
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    edited 1 April 2016 at 5:19AM
    dgaf wrote: »
    The bit in your reply above - can this £11K be used on dividends or interest even if I have already used up the £5K dividend allowance?
    Yes, but see grey gym sock's post and changes to my post.
    Interest is allowed first, even if you could have otherwise allowed it against the Savings Allowance. So you can have £(11k-interest)+5k of dividends, and the £6k allowances against interest are not used. It's not quite as good as I thought it would be. Try not to have more than £5k of unwrapped dividends.
    dgaf wrote: »
    My only income now is what I receive from savings interest and dividends.

    I am just trying to work out what will be best next FY, using the allowance for dividends (from my shares outside the ISA) or the interest on my savings.
    You don't get the choice of which order you apply the allowances.
    Eco Miser
    Saving money for well over half a century

  • darkidoedarkidoe Forumite
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    :TWell explained GGS! I can see how this much bureaucracy can only benefit the people who set the rules, making it so complicated for the layman to understand.

    On another note, that is some passive income you have here! Well done making it! Spend less than that and you have the option to not work again. FI FTW!

    Save 12K in 2020 # 38 £0/£20,000
  • edited 1 April 2016 at 3:05PM
    polymaffpolymaff Forumite
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    edited 1 April 2016 at 3:05PM
    Here's a simple, visual, model of 2016/17.

    Draw a, to-scale, column representing your taxable income. The top part of the column is any dividend income, the middle part is any taxable savings income, and the bottom part is any other taxable income (e.g. earnings, pensions).

    Now draw lines across the column at £11,000, £16,000 and £43,000.

    The following statements apply, in the order given:-

    Anything below the £11,000 line is taxed at 0%.

    Any taxable savings income below the £16,000 line is taxed at 0%.

    If the total column exceeds the £43,000 line then up to a further £500 of taxable savings income is taxed at 0%. If the column doesn't exceed the £43,000 line then make that £500 of taxable savings income £1,000.

    The first £5,000 of dividend income above the £11,000 line is taxed at 0%.

    What is left is taxable - below the £43,000 line at basic rate, above at higher rate.

    I hope that this model covers the great majority of tax-payers. It can be tweaked to include certain complexities. For instance if you claim for qualifying charitable giving, just lift the £43,000 line by that amount. It is even relatively easy to allow for above £100,000 - but those folk can afford an accountant. :)

    (puts tin hat on :))
  • edited 1 April 2016 at 4:45PM
    TuftywuftyTuftywufty Forumite
    6 posts
    edited 1 April 2016 at 4:45PM
    Thanks for the helpful model Polymaff. Correct me if I am wrong as I really need to understand this by applying the following example to the model:
    Total taxable income £44k made up from £38k pay, £5k dividend, & £1k savings interest. If personal allowance is £11k can it be assumed that there is 20% tax to pay on £27k, no tax on the £5k dividend and 40% tax to pay on £500 of the savings interest (or is it 20% on £500 to pay as this falls below the £43k line?) If so, it is different to what I thought as I previously assumed the 0% tax allowance on the £5k dividend meant it didn't count towards tipping total taxable income into higher rate band so thanks for the info.
  • polymaffpolymaff Forumite
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    Tuftywufty wrote: »
    Thanks for the helpful model Polymaff. Correct me if I am wrong as I really need to understand this by applying the following example to the model:
    Total taxable income £44k made up from £38k pay, £5k dividend, & £1k savings interest. If personal allowance is £11k can it be assumed that there is 20% tax to pay on £27k, no tax on the £5k dividend and 40% tax to pay on £500k of the savings interest. If so, it is different to what I thought as I previously assumed the 0% tax allowance on the £5k dividend meant it didn't count towards tipping total taxable income into higher rate band so thanks for the info.

    You'll be relieved to know that it is only £500, and not £500k - but, otherwise, you are correct.

    You raise a point I've been trying to get MSEers to recognise for some time - that there is a world of difference between "tax-free" and "taxed at 0%". The new Dividend Allowance is a "taxed at 0%" item - i.e. there is something be taxed - it is just taxed at 0%. As that something exists, it must be recognised when computing the total taxable income. My model works as well as it does because it forces you to work that figure out before you go hunting for any tax relief - and so you get the right result.

    The official term, by the way, is Adjusted Net Income. For further info, see:

    https://www.gov.uk/guidance/adjusted-net-income
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