I'm very late to this, but let me try answering the original question. (Which is horrendously complicated, by the way. The new allowances / reliefs interact in ways that can't have been thought through. A clean-up in the law is really needed here.)
Bouleversee wrote:Say someone's pension/earnings/profit (which I presume means from a business rather than share dealings) is £38,500, interest is £2,700, dividends £7,200, charitable donations £300 * and the personal allowance is £11,500. I presume the £300 and £11,500 are taken from the £38,500, leaving £26,700, taxable at 20% = £5340
leaving £6,800 of the b.r. band which is £33,500
£500 rather than £1000 is then deducted from interest of £2700, leaving £2,200, taxable @ 20% =
leaving £4,600 of b.r. band
or is it taxable at 40%?
Dividends were £7200 minus £5k allowance = £2,200 taxable at ??? 7.5%, 20% or 32.5% ???
Perhaps someone whose brain isn't as decrepit as mine could fill in the gaps.
*If anyone has the answer about donations being able to be set back into the previous year, I should be very grateful.
OK, so the gross taxable income consists of:
all other kinds (pensions/earnings/etc): £38,500
Which is a total of £48,400. After deducting the personal allowance (£11,500) from that (skipping, for the moment, the question of which kind of income to deduct it from), that leaves £36,900.
The basic rate band is £33,500, plus a £300 extension for gift aid.
To be precise, if you have paid £240 directly to charities under gift aid, then they will claim £60 from HMRC (representing basic rate tax, since £60 is 20% of the total £300 which they end up receiving), and your basic rate band is extended by £300. What you put on the tax return is the amount you paid the charities directly (£240). But if you meant that £300 was paid directly to charities, then the basic rate would be extended by £375. For this example, I'll stick with the basic rate being extended by £300.
You *can* carry back donations made in this tax year to 2017-18, provided that they are made before you submit your tax return (and before the 31 january 2019 deadline for submitting the tax return online). That goes in a different box on the return.
So ... taxable income after allowances (£36,900) is more than the extended basic rate band (£33,800). This means that the "personal savings allowance" is £500, not £1,000. This would be changed if the basic rate were extended by another £3,100. (Which is not to imply it's worth doing.)
What kind of income should the personal allowance be set against? Whatever method gives the lowest total tax due. Which is not always obvious.
Usually, it's best to set it against "other" income (rather than interest or dividends), so let's start by trying it that way. That would leave the following income as taxable:
all other kinds: £27,000
After using the personal allowance, there is no further choice about which type of income to take next. We must take it in the "order of taxation", which is "other" income first, then interest, then dividends.
So we have £27,000 of "other" income, all falling within the basic rate band, taxed at 20%, which is £5,400 in tax. There is still £6,800 of the basic rate to come.
Next, we have £2,700 of interest. Although the £500 "personal savings allowance" applies to the first £500 of this, the whole £2,700 of interest still uses up part of the basic rate band. So the tax due is 20% of £2,200, which is £440. And only £4,100 of the basic rate is left over.
Finally, we have £7,200 of dividends. The first £4,100 of this is within the basic rate band, the remaining £3,100 within the higher rate band. The £5,000 "dividend allowance" applies to the first £5,000 of dividends; frustratingly, that means it applies to the £4,100 of dividends in within basic rate and to the first £900 within higher rate, which leaves the last £2,200 of dividends within higher rate taxable at 32.5%, which comes tax of £715.
Total tax due is £5,400 + £440 + £715 = £6,555.
However, paying higher rate tax on £2,200 of dividends can be circumvented by setting part of the personal allowance against dividends. A better way to allocate the personal allowance is against £2,200 of dividends and £9,300 of "other" income. That way, the remaining taxable income is:
all other kinds: £29,200
The tax on "other" income is now 20% of £29,200, which comes to £5,840. After this, there is £4,600 of the basic rate band to come.
The tax on interest is unchanged, at £440. And after interest, only £1,900 of the basic rate band is left over.
And there is only £5,000 dividends to consider. £1,900 of this is within basic rate, and £3,100 within higher rate. But it is all covered by the £5,000 "dividend allowance", so no tax is due on dividends.
Total tax is now £5,840 + £440 = £6,280. (Which is £275 less than at the first attempt. In effect, we have got out of paying 32.5% higher rate tax on £2,200 of dividends, in exchange for paying 20% basic rate tax on £2,200 of "other" income; a net saving of 12.5% of £2,200.)
I hope I've made explained that OK. But it is ridiculous that the calculation has to be this complicated.