Income from savings and investments Flashcards

 Savings income  Taxing savings income  Dividend income  Taxing dividend income  Tax free investments  Other exempt income  Tax planning

1
Q

What are the five sources of potential savings income?

A
  • Bank interest
  • Building society interest
  • Interest from National Savings & Investment (NSI) accounts
  • Interest on investments in gilts (government securities)
  • Interest on loan stock from companies (loans made to a company)

These sources provide various opportunities for earning interest income, which can be subject to tax regulations.

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2
Q

Which types of interest are considered taxable income?

A

Interest from National Savings & Investment (NSI) Accounts and NSI Certificates is treated as taxable income.

Taxable income includes interest earned from specific government-backed savings schemes, which must be reported for tax purposes.

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3
Q

What factors should be considered when calculating savings income?

A
  • Tax bandings
  • Savings allowance

Understanding these factors is crucial for accurately determining taxable income and potential liabilities.

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4
Q

What are the rates for the savings allowance?

A
  • Basic Rate Band (BRB): £1,000
  • Higher Rate Band (HRB): £500
  • Additional Rate Band (ARB): £0

These allowances reduce the amount of savings income subject to tax, depending on the taxpayer’s income level.

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5
Q

What are the dividend income tax bands and rates?

A

The dividend income tax bands are:

  • Basic Rate Band (BRB): £1 - £37,700
  • Higher Rate Band (HRB): £37,701 - £125,140
  • Additional Rate Band (ARB): £125,141 and over

The tax rates are:

  • BRB: 8.75%
  • HRB: 33.75%
  • ARB: 39.35%

These bands and rates determine the taxation of dividend income based on the taxpayer’s overall income level.

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6
Q

What is the dividend allowance?

A

The dividend allowance allows for £1,000 of dividends to be taxed at 0% for BRB, HRB, and ARB taxpayers.

This allowance provides a tax-free threshold for dividend income, encouraging investment in shares.

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7
Q

What 11 types of investments and income are tax-free?

A
  • NSI certificates
  • Individual Savings Accounts (ISAs)
  • Statutory redundancy money
  • Income from NSI Certificates
  • Winnings and prizes
  • Scholarships and educational grants
  • Child benefit and some other social security benefits
  • Interest on damages for personal injuries
  • Local authority grants
  • Interest on income tax repayments
  • Interest on SAYE sharesave accounts

These types of income and investments do not incur tax liabilities, providing various avenues for savings and benefits.

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8
Q

How can tax planning strategies reduce income tax liability?

A
  • Investing the maximum yearly amount into an ISA whenever possible.
  • Investing in other tax-free options like National Savings & Investments certificates and Premium Bonds.
  • Ensuring that the spouse or civil partner with the lowest tax rate receives interest or dividends.
  • Transferring ownership of income-generating assets to the spouse or civil partner with little or no income.

Effective tax planning involves strategic decisions about investment ownership and maximizing tax-free allowances to minimize overall tax liability.

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