Rental property tax question

[Wizard]

I have income from 3 sources; earned, dividend and rental property. I am trying to get a handle on how the taxation of the three interact to understand how it works in the transitional phase of the new rental property taxation environment. Ultimately, because most of my dividends are paid by my own company I want to determine what level of dividend to pay.

My understanding regarding 2017/18 is as follows:
1. Earned income below £11,500 is tax free and the next £33,500 is taxed at the basic rate of 20%.
2. There was a dividend allowance of £5,000, above which dividends are taxed at 7.5% where income is below the total of the personal allowance and the basic rate band, above that the tax rises, in the first instance to 32.5% and ultimately to 38.1%.
3. In the first transitional year 75% of financing costs can be deducted from rental income and 20% relief claimed on 25% of the lower of adjusted income, financing costs not deducted or property profits.

What is not clear to me is how these items all 'stack' when looking at the total tax position and I am unable to find a worked example online with all three income aspects. I am therefore hoping to get some thoughts from fellow Fools on my example below.

Salary £5,000
Dividend Income £37,500
Rental Income £18,000
Finance Costs £6,000
Resulting Property Profit £13,500 (18,000 - (6,000 * 75%))

First use the Personal Allowance to give no tax on the Salary of £5,000 leaving £6,500 of personal allowance available (Taxable income so far £5,000)
Then use that remaining personal allowance to cover the first £6,500 of Property Profit, leaving £7,000 of Property Profit taxable at 20% giving rise to a tax charge of £1,400 (Taxable income so far £5,000 + £6,500 + £7,000 = £18,500)
Next apply the Dividend Allowance of £5,000 to cover the first £5,000 of dividend income (Taxable income so far £18,500 + £5,000 = £23,500)
Next apply dividend tax at the basic rate of 7.5% to the next £21,500 of dividend income giving rise to a tax charge of £1,612.5 (Taxable income so far £23,500 + £21,500 = £45,000)
Next apply higher rate dividend tax at 32.5% to the remaining £11,000 of dividends giving rise to a tax charge of £3,575 (Taxable Income for the year £45,000 + £9,500 = £56,000)

Tax reduction for the finance charge not utilised* = (6000*25%) * 20% = £300

Taxable income totals £56,000.
Tax payable = £1,400 + £1,612.5 + £3,575 - 300 = £6,287.5

Thoughts on this example would be very gratefully received, as would any links to online resources that cover this 'stacking' of different income types.

Terry.

Unused financing costs is the lowest of the available options for tax relief.

[helfordpirate]

The order of taxation is non-savings income (salary, trade, pension, rental income), savings interest, dividends and then certain bonds. See https://www.gov.uk/hmrc-internal-manual ... l/saim1090

However, as has recently become clear, while the order in which income is layered is fixed by legislation, the way the personal allowance is applied to income is not - or at least it can be applied in any way that minimises the tax to the tax payer. So for example, it makes sense to apply the allowance against dividends before interest if the interest would be covered by the interest allowance or the starting rate, and dividends would exceed the dividend allowance. Similarly, there are examples around the switch from basic to higher rates where "non-standard" ordering saves the tax payer money.

Earned income below £11,500 is tax free

So, it is up to you whether you choose to use the allowance on "earned income". However, as earned income is taxed more heavily than dividends it usually makes most sense.