3. Investment income

Question 1

What investment income is exempt from tax? (3)

Answer 1

• Interest from NS&I certificates
• ISAs
• Premium bond winnings

Question 2

What are the main tax benefits of investment income? (3)

Answer 2

Starting rate:
if savings income is less than £5,000 and also the within the first £5,000 of taxable income, it is taxed at 0%.

Savings income nil rate band:
Basic rate taxpayer: the next £1,000 is also taxed at 0%
Higher rate taxpayer: the next £500 is also taxed at 0%.
Additional rate taxpayer: no benefit.

First £2000 of dividend income always taxed at 0%

Question 3

What is the annual subscription limit on an ISA?

Answer 3

£20,000

Question 4

How do you tax gilt of loan notes?

Answer 4

Any gain on a gilt or loan note is tax exempt.

This is to reflect the issue of bond washing whereby prices are inflated to reflect interest accrued in period of ownership if interest was paid after sold.

Question 5

How do you work out what interest income (including accrued) is assessable to tax?

When is accrued income not taxable? (2)

Answer 5

Interest received in period: X
(Loan price x % interest x X/12)
Interest accrued in period: X
(Loan price x % interest x X/12)
= Total assessable to tax

Accrued income not taxable when:

• below £5,000
• Transferred on death