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Rates of tax

Particular provisions apply to the rates at which income tax is charged on ‘savings income� and ‘dividend income�.

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

Savings income is taxable at the basic rate, except where it falls within the ‘starting rate limit for savings� (for 2019-20 this amount is £5,000 - ITA07/S12) or is covered by the personal savings allowance (see below). Where it does so, income tax is charged at the ‘starting rate for savings, which is 0% (ITA07/S7).

Savings income: Personal savings allowance

From 2016-17 savings income not within the starting rate for savings may be covered by the personal savings allowance and charged to tax at 0%. »Ê¹ÚÌåÓýapp allowance applies to the first £1000 of savings income for basic rate taxpayers. For higher rate taxpayers the amount is £500 and there is no allowance for those taxable at the additional rate.

Savings income: basic rate tax is repayable

Basic rate tax paid on income chargeable at the starting rate for savings or covered by the personal savings allowance 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).

FA16/S5 introduced, along with the abolition of dividend tax credits (see below), a new ‘dividend allowance� for tax years 2016-17 onwards. For 2016-17 and 2017-18 it applied to the first £5000 of an individual’s income. From 2018-19 and 2019-20 it applies to the first £2000. In fact the ‘allowance� is a 0% tax rate inserted into ITA07/S8, as S8 (A1), properly called the ‘dividend nil rate�

Dividend income which would otherwise be chargeable at the basic rate is chargeable at the dividend ordinary rate - ITA07/S13 (1), which was amended by FA16/S5 to 7.5%, formerly 10%. Dividend income that would otherwise be chargeable at the higher rate is chargeable at the dividend upper rate - ITA07/S13 (2). This rate was not amended by FA16/S5 and remains 32.5%. However, as with the dividend ordinary rate, the practical effect with abolition of tax credits was to increase the tax charge but subject to the introduction of the ‘dividend allowance�. Dividend income which would otherwise be chargeable at the additional rate is chargeable at the dividend additional rate - ITA07/S13 (2A). FA16/S5 set the dividend additional rate for 2016-17 at 38.1%, up from 37.5%.

»Ê¹ÚÌåÓýapp tax credit available for tax years up to 2015-16 equal to 1/9 of the dividend (and thus equal to 10% of the dividend plus credit) attached to UK dividend income and certain foreign dividends was a credit against the tax liability on the dividend and not repayable. SAIM5090 onwards give more detail about dividend tax credits and their abolition.

»Ê¹ÚÌåÓýapp gov.uk website gives up to date dividend income tax rates and allowances under ‘Tax on Dividendsâ€�.

Trusts

Different rates apply to the savings and dividend income received by trustees. For tax years 2013-14 and subsequently the trust rate at ITA07/S9 is 45% set by FA12/S1 (3)(b). »Ê¹ÚÌåÓýapp dividend trust rate is increased by FA16/S5 to 38.1% for tax year 2016-17, up from 37.5%. See the Trust and Estates Manual (TSEM3000).