Personal Savings Allowance & Final dividend Payment

[eastway]

Hi all,

Having had a google and read through this thread (Excel Tax calculator for 16-17 I am still confused how to calculate my final dividend payment such that I do not exceed the basic rate threshold..

According to my accountant, using a spreadsheet they have provided me with, I can "earn" 43,500 in salary (~8,000), interest (~1,200) & dividends (~34,200) and stay within the BR band giving rise to a tax payment of 2,025 (ie just the 7.5% dividend tax as if you took 43,000 in salary & dividend), however the link above suggests the PSA is not used as:

"earnings + savings income fits in the personal allowance. I had this confirmed in my HMRC web chat."

If this is true, then in my example above the 500 over 43,000 will fall in the HR bracket, does anyone have any more clarity on the situation?

Unfortunately you can't prepare a dummy SA to put the figures in yet so I guess to be safe I'll go with the lower amount, but would be a shame to miss out on that extra 500 of dividends if I don't need to!

Thanks in advance..

[randomfella]

Did you read the thread to the end? Not sure what you are asking (dreaded early hours callout) but if you go into HR your PSA will reduce to £500.

In case it helps : Personal Savings Allowance - up to £1,000 interest tax-free

Can my savings within the personal savings allowance push me into a higher income tax band?

Man supporting tax burdenSimply, yes. However, the tricky question comes if your non-savings income, which would generally be income from work (whether employed or self-employed), is below the higher-rate threshold but your savings income would take you above it.

So do you get the £1,000 for basic-rate taxpayers or do you get the £500 for higher-rate taxpayers?

To work this out you first must add up your income from work and income from earned savings interest to get your total income. If that total income puts you in the higher-rate band (starts at £43,000 in 2016/17) then you are a higher-rate taxpayer and you only get the £500 of personal savings allowance (similarly for those at the additional-rate threshold – you wouldn't get the personal savings allowance at all).

Let's do an example...

The higher rate of tax starts on income above £43,000 (in the 2016/17 tax year). You earn £42,999 plus have £1,000 in savings interest. As your total income including interest is above the higher-rate threshold you'll only get the £500 personal savings allowance. So, £500 of your interest would be tax-free, while the remaining £500 would be taxed at the higher rate.

For a more detailed exploration of this, see Martin's blog on how the new personal savings allowance means some will be better off earning LESS interest.

[eastway]

Did you read the thread to the end? Not sure what you are asking (dreaded early hours callout) but if you go into HR your PSA will reduce to £500.

Thanks for the reply, the example I gave above is based on a 500 PSA, due to exceeding the HR threshold.. the confusion is whether the additional 500 over 43,000 is allowed at no additional tax, on the face of it the extra 500 is the 500 of savings inside the PSA, so should be allowed.

From the example above, 43,500 is made of salary (~8,000), interest (~1,200) & dividends (~34,200), with the divi amount being ~700 less (ie 1200-500PSA) than the salary/divi only approach (ie 8,100 salary and 34,900 divis), if the extra 500 would be taxed as high rate divis then effectively none of the interest earned would be inside the PSA, as the divis would have to be reduced to ~33,700 to avoid the HR, which is 1,200 less than the 34,900 in the salary/divi only approach.

The reason for the latter situation, given in the linked thread, is that, because the income plus the savings is less than the personal allowance you effectively don't get a PSA, so I was querying whether other's had been given this advice?

[SeededLoaf]

Yes, my understanding is that your savings interest + all other forms of income need to be within the BR limit. If you go 1 pence over, the interest free allowance cuts in half.

I pay myself a big dividend at the beginning of the financial year but leave a buffer to be filled with savings interest. Right at the last minute (this week) i'll work out how much buffer I have left after totting up all interest income and make a final small dividend payment. Because the interest rate is so meagre, it doesn't bear the thought of having to pay 40% tax on it.

[eastway]

Yes, my understanding is that your savings interest + all other forms of income need to be within the BR limit. If you go 1 pence over, the interest free allowance cuts in half.

I pay myself a big dividend at the beginning of the financial year but leave a buffer to be filled with savings interest. Right at the last minute (this week) i'll work out how much buffer I have left after totting up all interest income and make a final small dividend payment. Because the interest rate is so meagre, it doesn't bear the thought of having to pay 40% tax on it.

Sounds like you are in the same boat as me, I do exactly the same as you in terms of paying the big divi at the beginning of the tax year (roll on the end of the week )

So how are you calculating your final dividend, are you assuming you have a PSA or just bundling savings income with the non-dividend income?

The point is, if you assume you have a PSA, when actually you don't get the allowance you'll be paying the higher divi rate on that 500 you thought was "tax free", I'm genuinely surprised I haven't got more responses as I would have thought a lot of contractors are in this position..