Interest and Dividend tax allowance

For 2106/17 how will the £5000 nil rate on interest and the £5000 nil rate on dividends work together?
For example, if person A has £8500 earned income, £6500 interest income and £6000 dividend income. Would they pay zero tax (PA £11000, SPA £1000, Dividend and Interest £5000 each at nil rate). Or pay tax of £1000 as their total taxable income exceeds £17000 and so they lose the £5000 interest tax allowance at zero rate?
  • The tax calculation in 2016/17 for income of £21,000, comprising £8,500 earned income, £6,500 savings income and £6,000 dividend income, would be as follows:
    Total
    Non savings
    Savings
    Dividend
    £
    £
    £
    £
    Total income
    21,000
    8,500
    6,500
    6,000
    Personal allowance
    (11,000)
    (8,500)
    (2,500)
    Net income*
    10,000
    4,000
    6,000
    Tax calculation:
    Savings/dividend nil rate allowances**
     
     
    (1,000)
    (5,000)
    3,000
    1,000
    Taxed at 0%
    3,000 x 0%
    Nil
    Taxed at 7.5%
    1,000 x 7.5%
    75
    *The components of net income following the rules in ITA 2007 s16 would be:
    6,000               Dividends
    4,000               Savings Income
    **These do not reduce taxable income
  • Tim, you are right of course. Thank you for spotting the better answer. You can indeed allocate the personal allowance in the manner most beneficial to the taxpayer. This is a very good illustration of how the increasing number of rates and allowances are making our tax system so much more complicated. Let's hope that writers of other apps remember to build in that check. 
  • In the example, I understand that the dividends after deducting both types of allowance, would be taxed at 7.5%.
    But why is the net savings figure taxed at 0% ? I thought this only applied if the total Income was less than £17,000. In the example it's £21,000
  • Who is correct - Tim or Joanna?
  • Tim is correct. The legislation does not prescribe the order in which the personal allowance (PA) is offset, therefore the taxpayer may allocate it in the most beneficial manner.

    The introduction of the personal savings allowance and dividend nil rate band mean we must consider the interaction with the PA and starting rate band. Before the introduction of the new allowances, the PA would be offset left to right in the income tax computation. However, as the legislation states that the taxpayer may deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's income tax liability, it is now beneficial to ensure the PA is not wasted on income that would otherwise be taxed at 0% under the new allowances.

    In the example above the net income is £21,000. The PA should first be used to reduce NSI to nil.  This is because there are no other allowances available to offset against NSI.

    We are now left with £2,500 of PA. In the past we would have offset this against SI, working left to right in the computation. However there is a £5,000 0% starting rate band available for interest AND a personal savings allowance available of £1,000 (as the individual is a BRTP). Therefore only £500 of SI needs to be sheltered by the PA. The SI is now reduced to nil and there is no tax liability on the interest of £6,500.

    £2,000 of PA now remains and this can offset against the dividends to reduce them to £4,000. The new dividend nil rate band allows the first £5,000 of taxable dividends to be taxed at 0%, hence the £4,000 of taxable dividends gives rise to no liability.

    Please note this example and many more will be covered in the interest and dividend allowance webinar on 30 June 2016. For more information please visit https://events.icaew.com/ShoppingCart.aspx?com=detailview&iid=3917&st_t=46&st_ti=418&rid=232&returncom=productlist&source=search

    In response to Duncan’s questions, we have raised these software issues with HMRC as the answers are not known at present. We will communicate HMRC’s response once available.