Skip to content

Personal Tax – Dividends and Interest

Personal Tax – Dividends and Interest

Vanessa Cresswell

Vanessa Cresswell

Click edit button to change this text. Lorem ipsum dolor sit amet consectetur adipiscing elit dolor

Dividend and savings allowances are available. We consider the opportunities and pitfalls of the personal tax rules.

Dividend income

When dividends are received by an individual the amount received is the gross amount subject to tax. The availability of the Dividend Allowance (DA), means that the first £2,000 for 2019/20 of dividends are charged to tax at 0%. Dividends received above this allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £2,000 allowance.

Dividends are treated as the top slice of income and the basic rate tax band is first allocated against other income.

Example

Mr A has non-dividend income of £41,000 and receives dividends of £12,000. The non-dividend income is taxed first. Of the £41,000 non-dividend income, it would be advantageous to utilise £3,500 of the £12,500 available Personal Allowance, leaving £37,500 to be taxed at the basic rate.

The basic rate band for 2019/20 is fully utilised against the taxable non-dividend income. The remaining £9,000 of Personal Allowance is used against the dividends and £2,000 of dividends are covered by the Dividend Allowance. The remaining £1,000 of dividends (£12,000 less £9,000 Personal Allowance and £2,000 of DA) fall in the higher rate tax band and are therefore taxed at 32.5%.

Savings income

Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The Savings Allowance (SA) taxes savings income within the SA at 0%. The amount of SA depends on the individual’s marginal rate of tax. An individual taxed at the basic rate of tax has a SA of £1,000 whereas a higher rate taxpayer is entitled to a SA of £500. Additional rate taxpayers receive no SA.

Savings income includes:

  • interest on bank and building society accounts
  • interest on accounts with credit unions or National Savings and Investments
  • interest distributions from authorised unit trusts, open-ended investment companies (OEICs) and investment trusts
  • income from government or corporate bonds
  • most types of purchased life annuity payments.

Is savings income received net or gross of tax?

Interest is generally received gross. Following the introduction of the SA the government no longer requires banks, building societies, unit trusts and OEICs to deduct tax from interest they pay to customers.

Switching investments

Given the lower amount of SA, higher and additional rate taxpayers could seek to maximise their use of the DA by moving investments out of interest bearing investments to ones which pay out dividends. This could be through direct shareholdings or through dividend distributing equity funds in unit trusts or OEICs.

In addition, assets held for capital growth could be transferred to dividend paying investments. Any gains realised by the investors on the sale of assets would be exempt up to the CGT exemption which is £12,000 for 2019/20 (£11,700 for 2018/19). Further gains over this amount are charged to tax at 20% for higher and additional rate taxpayers.

Interaction between DA and SA

If the amount of dividends an individual receives is covered by the DA but those dividends would have meant that they were higher rate taxpayers without the DA, then this would affect the amount of SA they would receive.

Example

Mrs B has a salary of £42,000, interest income of £1,000 and dividends of £2,000. Although the dividends are covered by the DA, Mrs B’s total income is £45,000 so she is a higher rate taxpayer. She would therefore only receive £500 of SA against the £1,000 of interest income.

Check your coding

Where savings income exceeds the SA, there will be tax to pay on the excess. HMRC try to collect this tax by adjusting an individual’s tax code. To allow them to do this they will use information from banks and building societies. However in some cases, HMRC may overestimate the amount of interest people are likely to earn and adjust their coding accordingly. So it is always worth checking coding notices when they come through.

Gift Aid donations

Take care if you make Gift Aid donations. A charity can reclaim the tax on a Gift Aid donation only if the individual has paid the amount of tax being reclaimed.

Savings and dividend income covered by the SA and DA is not taxed. Where this happens the individual is responsible for ensuring that the donation is covered and HMRC has powers to recover any shortfall from the taxpayer.

Planning for spouses

The Dividend and Savings Allowances may also mean it is important to consider the allocation of investments between husband and wives or civil partners. If just one partner has investments generating dividends or savings it could be beneficial to transfer part of the investments to the other partner to ensure they receive income which utilises their DA or SA. Any transfer of assets between husbands and wives or between civil partners who are living together can be made without any capital gains tax being charged.

How we can help

With various allowances available to taxpayers it is important to make sure full use is being made of the tax free amounts. There are a number of areas where you may need specific advice depending on your circumstances so please do not hesitate to contact us.

Share this with your friends

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

More to explore

Venture Capital Trusts

Venture Capital Trusts (VCTs) are complementary to the Enterprise Investment Scheme (EIS), in that both are designed to encourage private individuals to invest in smaller high-risk unquoted trading companies affected by the equity gap. While the EIS requires an investment to be made directly into the shares of the company, VCTs operate by indirect investment through a mediated fund.

Read More »

VAT Flat Rate Scheme

The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

Read More »

VAT – Seven Key Points for the Smaller Business

This factsheet focuses on VAT matters of relevance to the smaller business. A primary aim is to highlight common risk areas as a better understanding can contribute to a reduction of errors and help to minimise penalties. Another key ingredient in achieving that aim is good record keeping, otherwise there is an increased risk that the VAT return could be prepared on the basis of incomplete or incorrect information.

Read More »

VAT – Cash Accounting

Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received.

Read More »

VAT – Bad Debt Relief

It is quite possible within the VAT system for a business to be in the position of having to pay over VAT to HMRC while not having received payment from their customer. Bad debt relief allows businesses, that have made supplies on which they have accounted for and paid VAT but for which they have not received payment, to claim a refund of the VAT by reference to the outstanding amount.

Read More »

VAT

VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them. The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules. We highlight below some of the areas that you need to consider.

Read More »