another question about order of taxation...

[Chrysalis]

If someone has income that breaks down approximately like this:
UK savings interest £4500
Foreign income £1200
UK dividends £7000
how will it be worked out how much tax they pay - can they arrange things so that no tax is paid?
And if they were to add in a little earned income, say £1-2k, how would that affect things?

I know we've had many helpful threads about the order of taxation of different types of income, but I am not sufficiently confident that I know how to apply the rules to this concrete example. Any help appreciated.

[Chrysalis]

Anyone?

[JohnB]

Dividends do not count as income for Starting Rate for Savings, so only your foreign income does, its well below 16.5k, so you get the full 5k allowance (+1k which doesn't help you), so no tax payable. Once your income goes above 16.5k you lose SRS pro rata.

Your foreign and dividend income combined are below your personal allowance, so no tax payable. 2k extra income still under. With the 2k dividend allowance I think you can go to (X+1200+(7000-2000) < 11850 before you start paying tax.

[greygymsock]

for the purposes of the "order of taxation", there are 3 types of income: savings (i.e. interest), dividends, and non-savings (i.e. everything else).

foreign income could be any of the 3. so you need to put it under the correct type.

i think JohnB is assuming that the foreign income is non-savings. though if it's dividends, you'd get the same result. but if it's interest, X (the maximum thta can be earned without paying tax) would be 1200 greater.

[Chrysalis]

Thanks, the foreign income is interest. I am still very confused about starting rate for savings.
In my example, I assume earnings must be put against the personal allowance first? Then, other non savings income (does that category include dividends?) and then interest (foreign or otherwise). If the savings interest pushes the amount over the personal allowance, there is still the starting rate, is that correct?
What about the dividend allowance, does that work ‘in parallel’ with SRS? (Not sure that’s clear, but say there was £8k of earnings. Would it then be earnings plus 3850 dividend income set against PA, with then £2000 of dividends tax free and the remaining 1150 taxed at 7.5%? Then how much SRS would there be? 5000-1150?)

[Chrysalis]

Sorry I realise that you just said non savings income doesn’t include dividends. So is ‘savings income’ dividends and interest, or just interest?

[JohnB]

I suggest you read this thread viewtopic.php?f=49&t=7455 and use the HMRC self assessment tax calculator online to do what if calculations.

[Chrysalis]

Thanks John, will do