Earned income of £12k - best way to arrange dividend and interest income?

[Chrysalis]

I am settling in to a new normal of earning about £12k. I’m wondering what the most tax efficient arrangement of dividend and interest paying assets would be? I have some flexibility as to whether I hold dividend paying or interest paying investments in tax shelters, and I could also gift assets to my spouse, who has more flexibility over pension contributions and gifting to reduce tax liability.
Any thoughts? Or is it not really worth the hassle beyond the obvious of continuing to transfer assets from taxable to ISA wrapper.
For extra info, I expect that at some point in the next couple of years the earnings will drop to close to zero, and in 6 years time I will have DB pension income that will mean I am a taxpayer for the rest of my life. Conversely, spouse’s income may hit a low or zero level at about the time my DB pension kicks in, and will stay that way for 5 or 6 years before again becoming a taxpayer for the duration.

For the purposes of this discussion, let’s assume the taxation regime for dividend and interest stays the same, although of course I assume that it will change over time, whatever the outcome of the election, probably in ways none of us might predict.

[genou]

I am settling in to a new normal of earning about £12k. I’m wondering what the most tax efficient arrangement of dividend and interest paying assets would be?...
For the purposes of this discussion, let’s assume the taxation regime for dividend and interest stays the same, although of course I assume that it will change over time, whatever the outcome of the election, probably in ways none of us might predict.

You would have 500 of Personal Allowance left ( from FY20 PA of 12.5k ) + 5k of starting rate for savings + 1k of Personal Savings Allowance to cover interest; and 2k of Dividend Allowance. So 12k in earnings, 6.5k in interest and 2k in dividends all tax free.

Above that level, dividends will be taxed at 7.5% rising to 32.5% if you have enough to get into higher rates. Interest will be taxed at 20% rising to 40% at higher rates.

[Chrysalis]

Thanks genou.
Do you know what circumstances lose the starting rate for savings? And which order the interest and dividend income are applied to the personal allowance?
I think, but I’m not sure, that I can allocate dividend income to my remaining personal allowance, but if I have more than the £2k zero rate band, plus whatever headroom in my personal allowance, then I lose the starting rate for savings, yes?

This year, I’m sure I’m above both the dividend zero rate band and the £1000 zero rate for interest, so I would allocate interest to my remaining personal allowance, and pay 20% tax on the excess interest and 7.5% on the excess dividends.

If I can get my dividend income below £2k, then hey presto I get an extra £5000 interest tax free, is that right? So total interest needs to be below £6k, or £5k, to benefit from this?

[JohnB]

When I had these questions I visited the HMRC tax return page and did lots of dummy submissions to test the scenarios

[genou]

Thanks genou.
Do you know what circumstances lose the starting rate for savings? And which order the interest and dividend income are applied to the personal allowance?
I think, but I’m not sure, that I can allocate dividend income to my remaining personal allowance, but if I have more than the £2k zero rate band, plus whatever headroom in my personal allowance, then I lose the starting rate for savings, yes?

This year, I’m sure I’m above both the dividend zero rate band and the £1000 zero rate for interest, so I would allocate interest to my remaining personal allowance, and pay 20% tax on the excess interest and 7.5% on the excess dividends.

If I can get my dividend income below £2k, then hey presto I get an extra £5000 interest tax free, is that right? So total interest needs to be below £6k, or £5k, to benefit from this?

Interest and dividends should not cause any restriction to the Starting Rate for Savings - earned income will. So as things stand you should be able to get full benefit from it.

[Chrysalis]

Ah, thanks. That sounds a bit too good to be true, but I’ll believe you.
I don’t submit my tax return, I use an accountant, so I don’t think I can play around with the tax submission software myself.

[genou]

Ah, thanks. That sounds a bit too good to be true, but I’ll believe you.
I don’t submit my tax return, I use an accountant, so I don’t think I can play around with the tax submission software myself.

If you have Excel, you can download from here : https://sa2000.co.uk/sa2018-19ol.xls and try some figures. The PA will be wrong, but that's easy enough to adjust for.

[Chrysalis]

Thanks again. I’ll give that a look.