Income from savings and investments Flashcards
Savings income Taxing savings income Dividend income Taxing dividend income Tax free investments Other exempt income Tax planning
What are the five sources of potential savings income?
- 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.
Which types of interest are considered taxable income?
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.
What factors should be considered when calculating savings income?
- Tax bandings
- Savings allowance
Understanding these factors is crucial for accurately determining taxable income and potential liabilities.
What are the rates for the savings allowance?
- 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.
What are the dividend income tax bands and rates?
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.
What is the dividend allowance?
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.
What 11 types of investments and income are tax-free?
- 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.
How can tax planning strategies reduce income tax liability?
- 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.