Self Assessment - savings interest & dividends

[PurpleMoonlight]

I've just filed my SA.

The eventual calculation appears correct but I didn't realise they add savings interest to you income before they assess the dividend tax. As my PAYE plus dividends were purposefully bang on the 40% threshold this has meant I am effectively paying 25% tax on the savings interest as it pushes the equivalent amount into the higher rate dividend tax.

Is this correct?

[Trailhead]

Yes - it's your total income plus savings and dividends.

[Eric Mc]

Of course they do - it's called "INCOME tax" for a reason. In other words, they want to tax your "INCOME from all sources.

There is one difference regarding bank/building society interest and dividends in effect for tax years 21016/17 onwards and that is a person can earn £5,000 in dividends and £1,000 in interest without that specific income being taxed - but it still is counted as income for determining when you start paying Higher Rate Income Tax.

[PurpleMoonlight]

It's the order that they apply everything that is annoying, and benefits HMRC and not the tax payer.

Earned income first.
Savings income second.
Investment income third.


Wonder where rental income comes in?

[Eric Mc]

Rental income is another form of "Investment Income" and is treated in a similar way to interest and dividends. It is NOT earned income as HMRC looks on it as deriving from an investment (land and property) rather than from a trading activity.

That is also the reason why Rental Income never attracts National Insurance contributions. NI is only levied on earned income i.e. income derived from doing a job - whether as an employee or through self employment/partnership.

[anonymous-user]

Eric Mc said:

NI is only levied on earned income i.e. income derived from doing a job - whether as an employee or through self employment/partnership.

Which is why you find people complaining, "It's not fair, I get so little state pension!". It's usually a failure to understand that receiving investment income isn't self-employment and they've enjoyed many years of not paying NI. If they haven't paid in they can't expect a generous pension to be paid out at the expense of the rest of us......although it is, of course, always someone else's fault,

drainbrain said:

I would urge anyone self-employed to keep an occasional eye on their SP status because things can fk up without anyone (HMRC included!) being aware of it. (in my case the fk up went on completely unwittingly for 25 years and I've only been able to 'repair' 10. )

[Eric Mc]

rockin said:

Eric Mc said:

NI is only levied on earned income i.e. income derived from doing a job - whether as an employee or through self employment/partnership.

Which is why you find people complaining, "It's not fair, I get so little state pension!". It's usually a failure to understand that receiving investment income isn't self-employment and they've enjoyed many years of not paying NI. If they haven't paid in they can't expect a generous pension to be paid out at the expense of the rest of us......although it is, of course, always someone else's fault,

drainbrain said:

I would urge anyone self-employed to keep an occasional eye on their SP status because things can fk up without anyone (HMRC included!) being aware of it. (in my case the fk up went on completely unwittingly for 25 years and I've only been able to 'repair' 10. )

I wasn't particularly making any sort of accusatory point. There are mechanisms available for those who have lived off investment income for many years to make voluntary NI payments to ensure they have an NI contributory record.

On the whole, I have never heard anybody who has lived off investments moan or complain about lack of State Pension later in life.

[anonymous-user]

Eric Mc said:

On the whole, I have never heard anybody who has lived off investments moan or complain about lack of State Pension later in life.

I agree that most people making good money have the sense to prepare alternative arrangements of their own by diversifying investments, using available tax breaks etc.