Which tax band applies if separate dividend and interest earnings?

[Bizman]

Apologies as I'm sure this a basic question for those in the know.

I earn part of my income in the form of UK dividend earnings and the other part in the form of interest on UK Peer-to-Peer (P2P) loans and mini-bond/loan notes I make.

Are dividend earnings and interest/P2P earnings calculated completely separately? E.g. it's only because of the total sum of my dividend earnings that I am in pushed into the 32.5% higher dividend tax band and exclusively with my loan note/P2P earnings that I am pushed into the 40% higher income tax band?

No impact on each other, so in one I can be in a basic rate and in the other I can be in the higher rate?

Or are the sums from all forms of earnings added together? If so, which higher rate tax band applies - the 32.5% dividend one or the 40% income tax one?

Thank you.

[AGoodman]

You add it all together but the very top slice (subject to the highest rates) is dividend income, then savings income (interest), then others.

It sounds like you would deduct your personal allowance from interest, then tax interest at basic rate (20%) until it runs out or hits higher rate threshold, then 40% on any remaining interest. Thereafter you apply relevant dividend rates to dividend income. Some of it may use your basic rate allowance if interest income did not absorb your entire basic rate band.

[robbob]

the hmrc calculation (when it works) will use the allowances as best suits you , this can come up with some strange allocations at times (pretty sure i have seen dividends used against perosnal allowance) so i wouldnt want to presume anything although most of the time the old skool rules still rock it out of the park as Agoodman has advised.

Unfortunately without commercial tax software its nigh on impossible to guess when a quirky situation may arise and save you some tax.

Even then we often have to wait till well after the end of the tax year for the online exclusion list to be completed so that we are certain its simply not a calculatoion no one has thought of yet for this year.

[maths]

Income tax is levied on aggregate income less any personal allowance (PA).

Non-savings income (eg salary) is taxed first, then savings income (eg interest) then dividend.

Thus, for example, dividend income may fall subject to the 32.5% and/or 38.1% because the non-savings income p[lius the savings income pushes the dividend income above the basic rate/higher rate thresholds.

Historically the most tax efficient option was to allocate the PA against non-savings income. However, the introduction of the Savings allowance (SA: £1,000 or £500) and the dividend allowance (DA: £2,000) has, depending upon figures, caused this allocation on many occasions to be tax inefficient ie maybe better to allocate the PA against the Savings income/Dividend income so as to cause this income to not fall subject to the higher/additional rates.