We strive to make complex financial concepts simple and easy to understand. We'll guide you through the taxation order in our calculation engine, which includes interest, dividends, and realized gains taxation. To help illustrate the process, we will also provide a real-life example with numbers.
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​Understanding the Order of Taxation
To ensure accurate tax calculations, it's essential to follow the correct taxation order. The order in Timeline Planning is as follows:

Step #1: Tax Sources of Income
​There's no change needed in this step, as the current process in Timeline Planning remains the same. We'll continue to tax sources of income as usual.
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​Real-Life Example:

Let's say John has a total taxable income of £40,000 from his salary and pension drawdowns. This places him in the basic rate tax band.

Step #2: Tax Interest
​To tax your interest growth, we first calculate your total taxable income from Step #1 to determine which tax band you fall into. Then, a progressive tax is applied to your interest growth minus the £5,000 allowance, starting from that tax band. The taxed portion will be taxed ABOVE the allowance.
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​Real-Life Example:
​John has £7,000 in interest growth. His total taxable income is £40,000 (from Step #1), which places him in the basic rate tax band. We subtract the £5,000 allowance from his interest growth, leaving £2,000 to be taxed at the basic rate of 20%. John's interest tax liability is £400 (20% x £2,000).
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Step #3: Tax Dividend
​Similar to Step #2, we calculate your total taxable income from Steps #1 and #2 to determine which tax band you fall into. A progressive tax is applied to your dividend growth minus the £500 allowance, starting from that tax band. The taxed portion will be taxed ABOVE the allowance.
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​Real-Life Example:
​John has £4,000 in dividend growth. His total taxable income, including interest, is £42,000 (from Steps #1 and #2), which still places him in the basic rate tax band. We subtract the £500 allowance from his dividend growth, leaving £3,500 to be taxed at the basic rate of 8.75%. John's dividend tax liability is approximately £306 (8.75% x £3,500).
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Step #4: Tax Realized Gains
​Finally, to tax your realized gains, we calculate your total taxable income from Steps #1, #2, and #3 to determine which tax band you fall into. A progressive tax is applied to your realized gains, starting from that tax band.
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Real-Life Example:
​John has £10,000 in realized gains. A progressive tax is applied to your realized gains minus the £3,000 capital gains allowance. We subtract the £3,000 allowance from the realized gains, leaving £7,000 to be taxed.
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His total taxable income, including interest and dividends, is £45,500 (from Steps #1, #2, and #3). This means that £4,770 will be taxed at 10% (capital gains rate for basic rate payers), and £2,230 will be taxed at 20% (capital gains rate for higher rate payers).
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John's realized gains tax liability is £923 (10% x £4,770 + 20% x £2,230).
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​Conclusion
​In this real-life example, John's total tax liability for the year is as follows:

Therefore, John's total tax liability for the year is £1,629 (£400 + £306 + £923).
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We hope this article and real-life example simplify the new GIA taxation module in Timeline Planning. Our goal is to help you easily navigate the complex world of taxes and financial planning.