As everyone is trying to get to grips with the changes for 2017 to advise clients on what is the most tax-effective way to draw income from private companies a little calculation seems to be doing the rounds which is causing us all to re-assess our mind-set when it comes to calculating the allocation of allowances.
Here is an example following that fine old mantra of Earned income, Investment income, Dividend income for the order in which allowances are allocated:
So Earnings covered by PA of £8500, balance of PA £2500 allocated to investment income, balance of investment income covered by the £5000 threshold. Dividends remain of £6000 less the £5000 threshold giving the £1000 charged at 7.5%.
To make use of allowances in the most beneficial way, what should be happening in the example above is this: The Earned income is covered by PA as there is no other allowance available for that income. This leaves PA of £2500. In the past we would have set this first against the Savings income, which is what’s happening in the example above. However, the £5000 starting rate AND the £1000 PSA is now available for the Savings income which leaves £500 to be covered by PA. That still leaves £2000 of PA to offset against the dividend income which leaves £4000 covered by the £5000 exemption, therefore zero liability.
Of course, in real life this scenario is unlikely to occur, but it goes to show how ingrained your thinking can become.