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:
    Non savings
    Total income
    Personal allowance
    Net income*
    Tax calculation:
    Savings/dividend nil rate allowances**
    Taxed at 0%
    3,000 x 0%
    Taxed at 7.5%
    1,000 x 7.5%
    *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
  • I disagree!

    I put this through my Taxpert calculator app ( and get zero tax.

    This is because you can allocate the PA in the way most favourable to the taxpayer. Allocate £500 only to the interest and £2,000 to the dividends and there is no tax to pay.

    Tim Good
  • 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
  • In response to Joanne - no, s16 simply prescribes the hierarchy for allocating income to the different rate bands whereas s25(2) allows the taxpayer to "deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax". S23 provides the seven step method for calculating tax and Step 2 deducts reliefs and allowances in accordance with s25 before Step 4 calculates tax at the appropriate rates (where s16 would indeed apply).