SAIM1080 - Savings and investment income: rates of tax on savings and investment income

Rates of tax

Particular provisions apply to the rates at which income tax is charged on ‘savings income’ and ‘dividend income’. The tax rates applying to savings income were changed in Finance Act 2008 which abolished the 10% ‘starting rate’ and 20% ‘savings rate’ of income tax, and introduced instead a 10% ‘starting rate for savings’.

SAIM1090 explains the rules for determining what part of a person’s income these tax rates apply to.

Savings income

For the purposes of the tax rates which apply to income, ‘savings income’ is defined in ITA07/S18 as:

• interest chargeable under ITTOIA05 Chapter 2 Part 4 ( SAIM2000)
• profits from deeply discounted securities chargeable under ITTOIA05 Chapter 8 Part 4 ( SAIM3000)
• income taxed under the Accrued Income Scheme ( SAIM4000).

‘Savings income’ excludes ‘relevant foreign income’ charged on the ‘remittance basis’ ( SAIM1140).

Savings income: the starting rate for savings: tax years 2008-09 onwards

For 2008-09 onwards, savings income is taxable the basic rate, except where it falls within the ‘starting rate limit for savings’ (2008-09 is £2,320 – ITA07/S12). Where it does so, income tax is charged at the ‘starting rate for savings), which is 10% (ITA07/S7).

Savings income: the savings rate: tax years up to and including 2007-08

For tax years up to and including 2007-08, ‘savings income’ was taxed at the savings rate of 20%. The savings rate applied to savings income that would otherwise be chargeable at the basic rate.

The savings rate also applied to income from purchased life annuities and life insurance contracts (not dealt with in this manual – see the Insurance Policy Holder Taxation Manual IPTM1000).

Annual payments, and a few of the other types of income covered in this manual, were taxable at the basic rate rather than the savings rate. See SAIM9120.

Savings income: basic rate tax is repayable

Basic rate tax paid on income chargeable at the starting rate for savings (for 2008-09 onwards) or the savings rate (up to and including 2007-08) is repayable. ITA07/S17 allows for claims to be made outside of self-assessment.

Dividend income: the dividend rates

‘Dividend income’ is defined in ITA07/S19. It means dividends from UK resident companies, dividends from non-UK resident companies, stock dividends, loans to close company participators that are released or written off, and relevant foreign distributions ( SAIM5000).

Dividend income that would otherwise be chargeable at the basic rate is chargeable at the dividend ordinary rate – ITA07/S13 (1). Dividend income that would otherwise be chargeable at the higher rate is chargeable at the dividend upper rate – ITA07/S13 (2).

ITA07/S8 sets the dividend ordinary rate at 10%, and the dividend upper rate at 32.5%.

The 10% tax credit attached to UK dividend income [and certain foreign dividends] is, as its name states, a credit against the tax liability on the dividend and is not repayable.

Trusts

Different rates apply to the savings and dividend income received by trustees. ITA07/S9 sets the trust rate at 40% and the dividend trust rate at 32.5%. See the Trust and Estates Manual TSEM3000+ for more details ( SAIM20000).