Savings and Investment Income Tax

If you earn savings or investment income, interest or dividends, you are liable to pay tax on the Gross amount earned. This gross amount is added to your total income to work out how much tax you need to pay.

Often, the tax is deducted at source. For savings income, tax is usually deducted by your bank or building society before they pay your interest to you. For investment income, the dividend is paid with a tax credit which satisfies any basic rate tax

You will need to declare any un-taxed savings or investments income to HMRC, for example if you are liable to tax at the higher rate, if interest has been paid Gross but should be taxable, if your total income exceeds your total allowances and reliefs and you have to pay tax on that income.

You will need to register for self assessment and complete a self assessment tax return if you have:

  • £10,000 or more in tax savings and investment income
  • £2,500 or more in untaxed savings and investment income

If you are an employee or a pensioner, and pay tax through PAYE, you can sometimes ask HMRC for the tax that you owe to be collected through your tax code.

Taxation of Savings Income

Savings income is taxed at your marginal rate. Which means that the gross amount of interest received is added to your income and you are taxed depending on which band it falls in. There is also a 10% savings rate of tax available for those with lower incomes.

Savings income is taxable in the tax year that the interest is paid to you (or credited to your account) even if you’ve earned it in previous tax years. You need to be particularly careful with things like fixed term bonds where interest is not payable until the end of the fixed term.

With effect from April 2016, you will find that banks and building societies will only pay interest gross (without tax deducted).

Taxation of Investment Income

Taxation rates on investment income are different to those on savings income. Like savings income, the gross amount of the dividend is added to your total income, however, there is only additional tax to pay on dividend income which falls within the higher or additional rate bands.

This changes with effect from the 2016-17 when the first £5000 of dividend income will not be taxed and you will then pay 7.5% up until the point you become a higher rate tax payer.

For some types of investment, such as investment bonds (life assurance bonds), there are special rules which apply as you are able to take withdrawals up to 5%, with tax deferred.

When you sell an investment you may be liable to capital gains tax.

How do I work out Gross Dividend?

Multiply the net dividend by 90 then times that result by 100

If you would like help with your self assessment tax return or your savings and investment income, including ways to reduce the tax you pay, please get in touch for a FREE, no obligation, review.

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