Tax rates
Savings income
Taxable savings income is regarded as the part of your taxable
income which is taxed after earnings,
pensions and other non-savings income. There is a 10% starting
rate for savings income only. The 10% band is limited to £2,710 of
savings income.
Below is a simple summary showing how the rules will apply to
you depending on the level of your taxable savings income or
dividends. We will go into more detail on how it all works in the
sections that follow.
Savings income that comes to £2,710 or less
Any savings income that comes to £2,710 or less when added to
your non-savings income will be taxed at 10%.
Savings income between £2,710 and £34,370
Any savings income that comes to between £2,711 and £34,370 when
added to your non-savings income will be taxed at 20%.
Savings income above £34,370
Any savings income that comes to more than £34,370 when added to
your non-savings income will be taxed at 40%.
UK dividend income less than £34,370
Any UK dividend income that comes to £34,370 or less when added
to non-savings income and savings income will be taxed at 10%
(offset by a tax credit of 10% when you receive the dividend,
meaning no further tax will be payable).
UK dividend income above £34,370
Any UK dividend income that comes to more than £34,370 when
added to non-savings income and savings income will be taxed at
32.50% (taking into account the 10% tax credit, the effective tax
you pay on the dividend you receive will be 25%).
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Upper and lower limits
What this means as a general rule (there may be some cases where
this doesn't apply, e.g. if you have work-based expenses you can
claim, so this is just intended as a basic guide) is that if you
have taxable non-savings income of:
- between £8,105 and £10,815 for those aged 64 and under
- between £10,500 and £13,210 for those aged 65–74
- between £10,660 and £13,370 for those 75 or over.
- the savings rate will apply to at least part of your
income.
If you are also receiving Blind Person's Allowance, which is
£2,100 for 2012/13, the upper limits will be increased by this
amount and you will get the savings rate if your non-savings income
is:
- between £8,105 and £12,915 for those 64 and under
- between £10,500 and £15,310 for those aged 65–74 or
- between £10,660 and £15,470 for those 75 or over.
So how do you work out tax on savings? Looking at it simply, it
depends entirely on how much earned income you have.
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(a) Only taxable savings income
If you have no earned income – pensions, wages or taxable state
benefits etc – and all your income is taxable savings income – you
will get your tax-free personal allowance against part of your
income and the next £2,710 will be taxed at 10% (the starting rate
for taxable savings) with any balance being taxed at 20%.
Example
Looking at Thomas again but now he has only £11,000 of savings
income – his tax will be worked out differently:
Savings income (total including any tax taken off)
£11,000
Less: tax free personal allowance £8,105
Taxable income £2,895
Thomas has no earned income and he has not used up any of his
starting rate for savings tax band, so he will be taxed up to the
limit of £2,710 at 10% with the balance at the 20% basic rate:
£2,710 @ 10% £271
£185 @ 20% £337
Tax due £308
Thomas will have had tax taken off by his bank or building
society at 20% before he gets his interest, so he will have to
claim a
repayment (link opens in a new window) of tax each year.
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(b) Non-savings (earned income) above the upper limit for the
savings rate
If your taxable non–savings income (i.e. earnings, pensions and
taxable state benefits etc) is more than the upper limits shown
above, the 10% savings rate will not be available and your taxable
savings income will be taxed in full at 20%.
Example
Looking at Thomas again – let’s say this time his earnings are
£12,000 and he has £1,000 of savings. His non-savings income is
more than £10,815 (have a look again at the upper and lower limits)
so he is taxed in full on the £1,000 savings at the 20% basic
rate.
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(c) Non-savings income is less than your tax free
allowances
If your non-savings income is below your tax allowances,
basically this means that you will get some of your tax-free
personal allowance to set against your savings income.
You will then get the next £2,710 of taxable savings income
taxed at the 10% rate (starting rate for savers) and any balance of
savings will then be taxed at 20% basic rate.
As you will have paid tax at 20% on your interest before you get
it, you will need to reclaim tax each year.
Examples
Thomas from the previous example still has income of £11,000 but
we will have a look at how his tax changes depending on whether the
income is earned income or savings:
1. £5,630 wages and £6,000 taxable savings
income
Non-savings use £5,630 of Thomas’s personal allowance of £8,105
leaving £2,475 to go against taxable savings
So:
£2,475 @ 0% £0
£2,710 @ 10% £271
£815 @ 20% £163
Tax due £434
2. £8,130 wages and £3,500 savings
Non-savings £8,130
Less: allowances £8,105
25 @ 20% = 5
Savings
Of the £2,710 savings rate band, £25 has been used up so £2,685
remains for Thomas to use:
£2,685 @ 10% £268
£815 @ 20% £163
Total tax due £431
3. £3,500 wages and £8,130 taxable savings
income
Non-savings £3,500
Less: allowances
£3,500
Savings income £8,130
Balance of allowance unused (8,105 –3,500) £4,605
Total
£3,525
Tax due
£2,710 @ 10% £271
£ 815 @ 20%
£163
Total=
£434
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(d) Non savings income falls inside the lower and upper
limits
If you have used up your tax-free personal allowance against
your non-savings income, but your remaining non-savings income is
less than £2,710, you can use the balance of the £2,710 against
your taxable savings income at the 10% rate. You are then taxed on
the balance of your taxable savings income at 20%.
Example
Fred aged 66 has taxable employment and pension income of
£10,690 and savings interest before any tax is taken off) of
£1,000. Fred's tax free personal allowance for 2012/2013 is £10,500
so he only has tax to pay on £190 (10,690-£10,500) on his
non-savings income. This means that he has used up£190 of the
£2,710 starting rate band of 10% for savings, leaving £2,520
available. His savings of £1,000 will be taxed in full at 10%
only.
However if Fred's non savings income amounted to £13,560, he
will be taxed in full at 20% on his savings income as taxable no
savings income is more than £13,210 (his allowance of £10,500 and
the savings rate band of £2,710).
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Dividends
If you do not pay tax at the higher rate of 40% (see below if
you do), then all your dividends or distributions from unit trusts
(but not interest) are taxable at the 10% rate only. They form the
very last part of your income and so are taxed at your highest rate
of tax. If you pay tax at 40% on your other taxable income, you
will pay tax at 32.50% on your dividends.
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Higher rate tax
Taxable income over £34,370 will be taxed at the 40% higher rate
(apart from dividends), whether or not it is savings income.
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Tax rates and allowances for those on income over £100,000
- A 50% additional rate of tax (the 50% additional rate is
reducing to 45% for 2013/2014) will apply to taxable income
above £150,000 and dividends over this amount will be taxed at
42.50%.
- The basic personal allowance will be subject to a single
income limit of £100,000. Where net income is less than or equal to
the £100,000 limit, an individual will continue to be entitled to
the full amount of the basic personal allowance. This also applies
to pensioners with incomes in excess of £100,000. The reduction in
the personal allowance is no longer restricted to bring allowances
down to the basic personal allowance of £8,105.
- Where adjusted net income is above the income limit of
£100,000, the amount of the personal allowance will be reduced by
£1 for every £2 above the income limit. The personal allowance will
be reduced to nil from this income limit.
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