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
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Impact of Dividends on £5000 savings allowance
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- Lemon Quarter
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Re: Impact of Dividends on £5000 savings allowance
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.
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- Lemon Half
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Re: Impact of Dividends on £5000 savings allowance
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.
As against the “Starting Rate for Savings” you are talking about.
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- Lemon Quarter
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Re: Impact of Dividends on £5000 savings allowance
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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- Lemon Half
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Re: Impact of Dividends on £5000 savings allowance
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.
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- Lemon Slice
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Re: Impact of Dividends on £5000 savings allowance
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...
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...
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- Lemon Quarter
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Re: Impact of Dividends on £5000 savings allowance
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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