Over recent years there have been changes in how income from savings and dividends are taxed. This is a brief summary.
Savings Income – normally Bank/Building Society Interest
- Tax is no longer deducted at source by Banks / Building Societies (from April 2017)
- There is a 0% Starting Rate band for Savings Income of £5,000 – this tapers on income over Personal Allowance Level
- There is a Personal Savings Allowance of:
- £1,000 for Basic Rate taxpayers
- £500 for Higher Rate taxpayers
- £0 for Additional Rate taxpayers
- Thresholds correct for 2023/24 onward
Note – dividends are not Savings Income for these purposes – Dividends are covered below.
How do these work in practice?
Well, the Starting Rate allows for an exemption up to starting rate plus your Personal Allowance (2024/25 £12,570) – it tapers off to the extent your other income (wages, pension, business profit) exceeds your Personal Allowance. This is easier to explain by example:
- If your other income exceeds £17,570 you get no Starting Rate (£12,570 + £5,000)
- If your other income is less that £12,570 your Starting Rate is £5,000
- If your other income is between £17,570 and £12,570, your Starting Rate is £5,000 less £1 for each £1 that your other income exceeds £12,570
See HMRCs fact sheet on Savings Income
The Personal Savings Allowance comes on top of these amounts.
In practice this means:
- You disregard the first £1,000 or £500 of interest (the Personal Savings Allowance); then
- You apply the Starting Rate banding above
In theory for 2024/25 you could have £18.570 of tax free income, being £12,570 Personal Allowance, £5,000 0% Starting Rate and £1,000 Personal Savings Allowance, but this is only going to apply to someone with Savings Income – interest – of more than £6,000, and other income such as pension or wages, of less than £12,570 – somewhat hypothetical.
This is an absurdly complex regime for people on low income For pensioners, the low income and those living off savings, the regime is relevant, but if your income from other sources exceeds £17,570 (2024/25) – which applies to most people – then the Starting Band will not be relevant, although the Personal Savings Allowance will be.
Dividends
Although dividend income is investment income, in tax speak its not Savings Income, and the regime outlined above for savings income doesn’t apply.
Rules for dividends changed from 2016/17 onwards:
- Dividends no longer carry a tax credit or are subject to grossing up.
- There is a Dividend Allowance – note the Dividend Allowance is part of the regular Basic Rate and Higher Rate bands, and not separate – it is a nil rate on that slice of dividend within the regular tax band. Dividend Allowance rates are:
- 2016-17 onward – £5,000
- 2018-19 onward – £2,000
- 2023/24 – £1,000
- 2024/25 onward – £500
- Dividends over Dividend Allowance are taxed as follows:
- Basic Rate 8.75% from 2022/23 (7.5% 2021/22 and earlier years)
- Higher Rate 33.75% from 2022/23 (32.5% 2021/22 and earlier years)
- Additional Rate 39.35% from 2022/23 (38.1% 2021/22 and earlier years)
The previous regime of grossing up dividends with tax credits for Corporation Tax paid is now abolished.
Effective Tax Rates for Small Company Shareholders
Dividends don’t exist in isolation, as they are a post tax distribution of company profit to shareholders, paid after Corporation Tax.
Directors and shareholders of small companies will therefore want to look at the combined Corporation Tax and Dividend Tax rates.
Please view our page on Limited Company Taxation for a current analysis of the effective tax rates on dividends combing Corporation Tax and Dividend Tax.