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Where Taxpayers and Advisers Meet

Savings starting rate= confusion!

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Savings starting rate= confusion!

Postby Ian McTernan CTA » Mon May 01, 2017 12:41 pm

This is mainly for my follow experts, as I have been having fun trying to get the right answer for the correct amount of tax to pay. My software of course calculates it for me, but I always like to check and see if it's correct and this one was not straightforward!

Case is quite simple: single man in 40's. Tax Year 2016/17. PA £11,000.

Salary £8,000
Income from bank accounts paid gross: £5,540
Dividends received £29,500

Work out the tax payable with reasons.
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
Email through link on website:
http://www.imcternan.com

robbob
Posts: 2827
Joined: Wed Aug 06, 2008 4:01 pm

Re: Savings starting rate= confusion!

Postby robbob » Mon May 01, 2017 2:50 pm

Why do i get the feeling this is a trick questions - hey ho - nowt like a bit of trickery on a bank holiday.


Ok no tax on salary - covered by personal allowance.

Tax On savings interest - on the basis that non savings income + interest received is less than 16k - then there is nil tax to pay with regard to interest received. Note with total income being £40 into higher rate let's say there was the 5k nil starting rate and 500 Nil rate available, as interest received is 5,540 - this is £40 over the the amount covered by the starting/nil rates - but thats ok as there is also personal allowance available.


Dividend tax Ok this is when it gets tricky we know 5k is tax free and £40 will be taxed at higher rate 32.5% (divis being top slice) so that leaves us with the quandry as to whether the savings interest mentioned above used the personal allowance before the starting rate bands and or before the dividend income is factored in. We all know hmrc are nice bods :) so i am presuming they allow us to set the interest received against the starting rates before eating into personal allowances - thus leaving some pa to scoop up with divis.

Ok so available personal allowance was 11k - 8k salary less £40 used up by the savings interest - this leaves us 2960 pa to use against dividends.

In summary we have

2960 falling within personal allowance - nil tax
5000 nil rate - nil tax
21,500 (balancing figure) taxed at 7.5% = 1612.50
40 at 32.5% = 13.00

Total tax to pay 1625.50

Ok my confession based on the fact that the questions was anything other than the following
Case is quite simple
:

is that i have worked by from my hmrc approved tax calculator to get this answer - now this is not a good thing for 16/17 factoring in the fact that approved calculators do come up with the wrong answer under certain situations, thankfully my software provider have indicated i will be warned if the calculation is wrong but follows hmrc official calculations (I.e they couldnt get the official calcs right themselves so what chance do i have making it up ?? !!! :( :(). and i didnt get a warning.

http://www.accountingweb.co.uk/tax/hmrc ... per-filing

Any official links to the interaction between dividend income / savings interest / personal allowances and savings allowances would be useful as the above could all be jackanory.

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Re: Savings starting rate= confusion!

Postby Ian McTernan CTA » Mon May 01, 2017 4:43 pm

Spot on Robbob!

It's the interaction of them all that was the tricky part. Many people don't utilise the £5,500 savings starting rate etc and assume as the total income is over the £16k threshold that you lose it.

It's also quite hard to explain how it all works to clients without burying them in calculations!

You've earned one credit. (I have no idea what a credit is, but you just earned one).
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
Email through link on website:
http://www.imcternan.com


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