Your savings income: What is it and how is it taxed?

March 7, 2017 | Posted by Sonal Agarwal | Accounting, Business Advice, Taxation, Whitepapers,

savings incomeWhat is your savings income?

Your savings income comprises of interest from banks, building societies, national savings and investments. It also includes company and unit trust dividends but it doesn’t include pension income because this is taxed as employment income.

How is it taxed? 

The way savings income is taxed has changed radically and from April 2016 banks and building societies have stopped deducting the income tax before they pay you the interest, therefore the interest is still taxable and it’s now your responsibility to settle any tax that is payable.

Savings income falls in to the top tax bracket (after employment income, trade profits, rental income etc.). However, if your savings income falls within your personal savings allowance, it will be taxed at 0%.

The savings allowance works like this:

Type of income 

Basic rate taxpayer 

Higher rate tax payer 

Additional rate tax payer 

Interest

£1,000

£500

£0

Dividends

£5,000

£5,000

£5,000

The Dividend Allowance will reduce to £2,000 from April 2018.

Should I keep any records?

There are a number of records you could keep, the most important will likely include:

  • Bank and building society statements or passbooks
  • Statements of interest and any other income received from your savings and investments which could include annuity investments, for example
  • Any tax deduction certificates given by your bank
  • Dividend vouchers received from UK companies
  • Other vouchers such as scrip dividend vouchers (paper or electronic format)
  • Unit trust tax vouchers
  • Details of any income you receive from a trust, real estate investment company
  • It would also be sensible to keep details of exceptional amounts you used to fund your investments, for example, a sum you inherited or any other windfall. Likewise, you may also need to keep copies of correspondence and other documentation relating to your savings and investments.

Are there any tax free savings?

Certain saving incomes are tax free, and these include:

  • Income from National savings certificates and Premium bonds
  • Dividend on first £200,000 of Venture Capital Trust shares acquired in a tax year.
  • Income from ISA: 

It’s possible to invest up to £15,240 in an ISA, and the limit increases to £20,000 for the 2017-18 tax year.  You can invest in a cash ISA or you can invest some or all of your allowance in a stocks and shares ISA, which shelters any gains from capital gains tax, however you will have the risk of this investment decreasing rather than increasing in value. Additionally, from April 2016, you can invest your allowance in peer-to-peer loans through the new innovative finance ISA.

In addition, another tax free savings route is a Junior ISA, and you can invest up to £4,080. You will not pay any Inheritance tax on the first £3,000 invested in a junior ISA in a tax year.

Don’t forget, you cannot carry forward your annual ISA allowance, therefore it is a good idea to make use of it before the end of the tax year.

Top tips:

  • Make sure you utilise your annual ISA allowance before the end of tax year, because not only is your income tax-free but it will also save you from a lot of record keeping.
  • It is also a good idea to discuss your savings income with your accountant to ensure you receive a tax-efficient pay-out structure, this is especially relevant if you are an owner-director in your company.

As a fully qualified tax adviser and accountant and with an impressive history in the corporate environment; Sonal brings significant experience and expertise to RightCue Tax Advisers, where she has the role of Managing Partner. If you would like further advice on any of the above, please contact Sonal on 01256 406601 or sonal.agarwal@rightcue.co.uk.

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