The UK has rationalized it's tax treatment of interest on savings and dividends (NB this question is concerned entirely with investments held outside of SIPP or ISA tax wrappers). More details here and here - also here and here - the short story seems to be:
- First £1000 of interest tax free, then 20% (assuming basic rate tax payer).
- First £5000 of dividends tax free, then 7.5% (for basic rate).
My question is basically, how would this hypothetical illustrative question be answered:
An investor has a personal allowance of £11000. Their income for the year consists entirely of £10000 in interest and £10000 in dividends. How much tax do they pay? (And please explain your calculation)
(I'm confused whether they'd just pay tax on the entire excess over the thresholds mentioned above, or whether the personal allowance also soaks up some of the income... in which case the question arises whether it preferentially and advantageously soaks up the interest rather than dividends.)