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Impact of Dividends on £5000 savings allowance

Practical Issues
Gan020
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Impact of Dividends on £5000 savings allowance

#255359

Postby Gan020 » October 2nd, 2019, 11:00 am

I've spent half an hour looking on the web for an answer to this and I've reached point of knowing someone on the TLF will be able to answer this quickly.

I am lucky in that I can arrange my income, interest, dividends to some extent.

Currently mine and my wife's situation looks something like this:
Income £12,500 (0% tax payable as fill up the allowance)
Interest £2,500 (0% tax as I partially fill up the £5,000 allowance as I don't have any income above £12,500)
Dividends £2,000 ( 0% tax payable as I fill up the allowance)
Total £17,000 (0% tax)

I am considering increasing the level of dividends to £7,000 which I know will be taxed at 7.5% as this stacks after my income.

My question is what happens to the £5,000 interest allowance. Do I keep this or lose it?
If I keep the savings allowance I pay tax of 7.5% on £5,000 = £375
if I lose it I presumably pay 7.5% on £5,000 + 20% on (£2,500-£1,000)= £375+£300 = £675

genou
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Re: Impact of Dividends on £5000 savings allowance

#255377

Postby genou » October 2nd, 2019, 12:29 pm

Gan020 wrote:I've spent half an hour looking on the web for an answer to this and I've reached point of knowing someone on the TLF will be able to answer this quickly.

I am lucky in that I can arrange my income, interest, dividends to some extent.

Currently mine and my wife's situation looks something like this:
Income £12,500 (0% tax payable as fill up the allowance)
Interest £2,500 (0% tax as I partially fill up the £5,000 allowance as I don't have any income above £12,500)
Dividends £2,000 ( 0% tax payable as I fill up the allowance)
Total £17,000 (0% tax)

I am considering increasing the level of dividends to £7,000 which I know will be taxed at 7.5% as this stacks after my income.

My question is what happens to the £5,000 interest allowance. Do I keep this or lose it?
If I keep the savings allowance I pay tax of 7.5% on £5,000 = £375
if I lose it I presumably pay 7.5% on £5,000 + 20% on (£2,500-£1,000)= £375+£300 = £675


You should only pay £375 additional.

PinkDalek
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Re: Impact of Dividends on £5000 savings allowance

#255384

Postby PinkDalek » October 2nd, 2019, 1:01 pm

Don’t forget the “Personal Savings Allowance” of £1,000 for basic rate taxpayers (or non taxpayers). That should save you another £75.

As against the “Starting Rate for Savings” you are talking about.

genou
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Re: Impact of Dividends on £5000 savings allowance

#255394

Postby genou » October 2nd, 2019, 1:42 pm

PinkDalek wrote:Don’t forget the “Personal Savings Allowance” of £1,000 for basic rate taxpayers (or non taxpayers). That should save you another £75.

As against the “Starting Rate for Savings” you are talking about.


Is that going to work on the OP's figures - would it not only shelter interest income, rather than dividends. Would you not need to change the interest/dividends mix to get at the PSA ?

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Re: Impact of Dividends on £5000 savings allowance

#255396

Postby PinkDalek » October 2nd, 2019, 1:46 pm

genou wrote:
PinkDalek wrote:Don’t forget the “Personal Savings Allowance” of £1,000 for basic rate taxpayers (or non taxpayers). That should save you another £75.

As against the “Starting Rate for Savings” you are talking about.


Is that going to work on the OP's figures - would it not only shelter interest income, rather than dividends. Would you not need to change the interest/dividends mix to get at the PSA ?


I shouldn't have posted whilst watching The World Cup and dropped the ball. I was thinking the OP was looking to increase interest income as against dividend income. Mea culpa.

Gan020
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Re: Impact of Dividends on £5000 savings allowance

#255405

Postby Gan020 » October 2nd, 2019, 3:09 pm

Thanks everyone. I guess what I'm trying to do is work out how best to plan my investments to minimise my tax burden.

Once I've filled up my income tax allowance £12.5k, dividend allowance £2k, savings allowance £5k, capital gains tax allowance £12k(I have space in my savings allowance and cgt allowance), the incremental rates of tax for a basic rate taxpayer are:
dividends 7.5%
CGT 10.0%
interest 20.0%

I'm not too bothered about the difference between 7.5% and 10.0% as I believe I'm better off focussing on making money rather than focussing on the tax. However, I am interested in the difference between the lower two and 20% and whilst it's difficult (but not impossible) to organise my investments to get dividends instead of interest, that of course usually comes with risk in that dividends involves (meaningful) risk to capital whereas with interest the risk is very low. There's not much point in minimising my tax bill if it doesn' t maximise my overall outcome.

Of course governements change tax rules as well...

genou
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Re: Impact of Dividends on £5000 savings allowance

#255411

Postby genou » October 2nd, 2019, 3:55 pm

Gan020 wrote:However, I am interested in the difference between the lower two and 20% and whilst it's difficult (but not impossible) to organise my investments to get dividends instead of interest, that of course usually comes with risk in that dividends involves (meaningful) risk to capital whereas with interest the risk is very low...


In that case, if you rejigged so that you were 6k in interest and 3.5k in dividends, you would pay

5k @ 0% ( interest allowance )
1k @ 0% ( PSA )
2k @ 0% ( Dividend allowance )
1.5k @ 7.5% = tax paid of £112.50 .

I think that's the sweet spot for this level of taxable income.


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