Personal Tax: Income Tax, Savings, Dividends and Capital Gains
Income tax structure
Personal tax starts with total income from employment, trading, property, savings and dividends. Deduct allowable reliefs (such as trading losses or pension contributions under net pay or relief at source rules) to reach net income, then the personal allowance to reach taxable income. The personal allowance is tapered for high earners and lost entirely above the upper limit. Know the difference between the savings starting rate, the personal savings allowance and the dividend allowance.
Ordering and rates
Non-savings income is taxed first, then savings, then dividends, each filling the basic, higher and additional rate bands in order. The dividend nil-rate band is not a relief; it simply taxes the first slice at 0% while still using the band. The personal savings allowance depends on the marginal rate: basic-rate taxpayers get a set amount, higher-rate a smaller amount, additional-rate none.
Capital gains tax
Compute gains as disposal proceeds less allowable cost and incidental costs, then deduct the annual exempt amount. Use the correct rate depending on the taxpayer's income and the type of asset (residential property and carried interest have different rates). Understand reliefs such as business asset disposal relief, holdover and rollover relief, and the interaction of losses.
Traps and worked rule
Traps: applying the personal savings allowance to dividends; forgetting to taper the personal allowance; taxing dividends before savings; ignoring the annual exempt amount. Rule of thumb: stack income in order (non-savings, savings, dividends) and apply allowances where they are most beneficial.
Worked example: A basic-rate taxpayer has salary £30,000, savings interest £1,500 and dividends £3,000. Personal allowance £12,570 reduces salary to £17,430 taxable. Savings: £1,000 personal savings allowance plus £500 starting rate = tax-free. Dividends: £500 dividend allowance, remaining £2,500 taxed at the dividend basic rate.