Personal Savings Allowance 16/17

It was noted in an article below that it is important you don't go into the higher rate band even by a small amount: 


But in another confusing twist, if you have a reasonable amount of other income, you might want to get a lower rate of interest on your savings.



The problem is that the new allowance is a two tier system- you are either a higher rate taxpayer or a basic rate one, and the amount of the allowance depends on that- even if you are only just into the 40% band.



If you earn just under the current (2016/17) 40% band, say £42,000, a difference of 0.2% in interest rate could mean they get less overall. If you had £60,000 savings earning 1.8%, that would generate £1,080 interest, giving total income of £43,080. As a higher rate taxpayer (by £80), only £500 of the interest would be tax free and the remaining £580 would be subject to tax.



But if the rate on that £60,000 were only 1.6%, the interest would be £960, which is less interest, but it is all tax free; as a basic rate taxpayer (total income £42,960) the savings allowance is £1,000, meaning you’d actually be better off (marginally) with a lower rate of bank interest. A similar (but more sheer) difference occurs at the higher rate/additional rate threshold.

Good question, I am not sure how this fits in, but I am going to take a guess!

When the Self Assessment allows us in for 2016/17, we might be able to play with some figures and see how they all work together. 

I believe the £5000 dividend allowance is applied, no matter what tax band your income falls into

I believe savings Income is taxed AFTER employment income but BEFORE Dividend income (eg salary>savings>dividend).

So it appears you could have
£11000 salary (or savings) income
£6000 savings income
£5000 dividend income

So a combination of £22,000 and pay NO TAX

Above this, you may lose your savings allowances, but would retain your dividend allowance on dividend income. 

If you do pay tax on your dividends, you could use VCT's to reduce your income tax bill

So for example here www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

Example 6

“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”



Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.



This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.



The remaining £4,000 of dividends are all taxed at higher rate (32.5%).

Yes I as far as I can tell you are right. I dont think it is working it correctly. It seems to be treating the personal allowance and the savings allowances as two seperate entities rather than one which affects the other. Ive tried playing around with the HMRC tax checker (which doesnt seem to include the PSA yet unhelpfully) to see how it works.

The way it works is for every £ of salary over the personal allowance you lose £ off the 0% savings band & then the PSA on top

So if you earn £11k you get 5k untaxed interest plus £1k PSA
If you earn 13k you get £3k untaxed interest plus £1k PSA
If you earn £16k you get £0 untaxed interest plus £1k PSA

Interest over & above these sums is taxed at relevant rate.

The key is the level of salary, if thats below £11k you get £5k 0% savings band, even if you earn £50k in interest.

So for your example you pay £400 tax on salary & £400 on interest I believe

It is a common misconcepcion that PAYE is tax, it is actually a payment on account of income tax, introduced just after the second world war when many more people became liable to tax and it was felt they might not be able to budget to pay their liability in one lump sum after the tax year end.

Also most people in self employment make two payments on account of their liability prior to the actual date the tax is due, which is 31 January in the year following the end of the tax year, e.g. tax due for 2015/16 is due 31 January 2017.  However by that time the vast majority of tax payers will have paid all or most of what they owe either through PAYE or payments on account.  Any under or over payment is dealt with by a payment or adjustment to PAYE code.

At present there is no proposal to change the system of payments on account therefore for the majority of people there will not be any speeding up of tax collection; however once the government has this information there is nothing to say that they may alter to rules to get money in quicker.

So what if I have no salary at all and the only income I receive is from Bank savings and P2P. How much of this is tax free?

Provided your not over the basic rate limit, which reduces your £1k PSA

£15,600 (= £10,600 personal allowance + £5k savings allowance)