Which tax rates apply to me?

In this section we will be having a look at tax on your earnings or other non savings income and then moving on to look at how savings income is taxed.

Earnings or non savings income

Firstly we look at tax on your non savings or earned income and this includes amongst other things – wages, pensions, taxable state benefits and self employed profits. It does not include taxable savings income which we look at next. After taking off your allowances and any allowable expenses, for the current tax year 2012/13, you pay tax up to a limit of £34,370 at the rate of 20% (called basic rate). The limit will be reduced for 2013/14 to £32,245.
It is worked out like this:
Earned income (wages and pensions etc. added together) less your tax free personal allowance gives you your taxable income (income you pay tax on).
You then tax the taxable income at 20% up to the limit of £34,370. Any earned income above this amount is taxed at higher rates. There is more on higher rates here.

Have a look at Example 1.

Savings income

Your taxable savings income is regarded as the part of your taxable income which is taxed next. There is a 10% starting rate for savings income only. The 10% band is limited to £2,710 of taxable savings income.

Summary of how savings rate works

Below is a simple summary showing how the rules will apply to you depending on the level of your taxable savings income or dividends.

Savings income that comes to £2,710 or less

Any savings income that comes to £2,710 or less when added to your non-savings income will be taxed at 10%.

Savings income between £2,711 and £34,370

Any savings income that comes to between £2,711 and £34,370 when added to your non-savings income will be taxed at 20%.

Savings income above £34,370

Any savings income that comes to more than £34,370 when added to your non-savings income will be taxed at 40%.

UK dividend income less than £34,370

Any UK dividend income that comes to £34,370 or less when added to non-savings income and savings income will be taxed at 10% (offset by a tax credit of 10% when you receive the dividend, meaning no further tax will be payable).

UK dividend income above £34,370

Any UK dividend income that comes to more than £34,370 when added to non-savings income and savings income will be taxed at 32.50% (taking into account the 10% tax credit, the effective tax you pay on the dividend you receive will be 25%).

Upper and lower limits

What this means as a general rule (there may be some cases where this doesn't apply e.g. if you have work based expenses you can claim – so this is just intended as a basic guide) is that if you have taxable non-savings income of:

between £8,105 and £10,815 for those aged 64 and under
between £10,500 and £13,210 for those aged 65–74 or
between £10,660 and £13,370 for those 75 and over

– the savings rate will apply to at least part of your income.

If you are also receiving blind person's allowance which is £2,100 for 2012/13 – the upper limits will be increased by this amount and you will get the savings rate if your taxable non-savings income is:

between £8,105 and £12,915 for those 64 and under
between £10,500 and £15,310 for those aged 65–74 or
between £10,660 and £15,470 for those 75 and over

(a) Only taxable savings income

If you have no earned income – pensions, wages or taxable state benefits etc – and all your income is taxable savings income – you will get your tax free personal allowance against part of your income and the next £2,710 will be taxed at 10% (the starting rate for savings) with any balance being taxed at 20%.

Have a look at Example 2.

(b) Non savings (earned income) is above the Upper limit for the savings rate

If your taxable non–savings income (i.e. earnings, pensions and taxable state benefits etc) is more than the upper limits shown above the 10% savings rate will not be available and your savings income will be taxed in full at 20%.

Have a look at Example 3.

(c) Non savings income is less than your tax free allowances

If your taxable non savings income is below your tax allowances – basically this means that you will get some of your tax free personal allowance to set against your savings income.
You will then get the next £2,710 of taxable savings income taxed at the 10% rate (starting rate for savers) and any balance of savings will then be taxed at 20% basic rate.
As you will have paid tax at 20% on your interest before you get it – you will need to reclaim tax each year. Have a look at some examples of how this works:

Thomas from the previous example still has income of £10,000 but we will have a look at how his tax changes depending on whether the income is earned income or savings.
Have a look at Examples 4 to 6.

(d) Non savings income falls inside the lower and upper limits

If you have used up your tax free personal allowance against your non savings income but your remaining non savings income is less than £2,710 – you can use the balance of the £2,710 against your taxable savings income at the 10% rate. You are then taxed on the balance of your savings income at 20%.
Have a look at Example 7.

Use the link for more information on taxing bank and building society interest.

Mainly for those over 65 – use the link to see more examples of how the starting tax rate for savings and the basic rate of tax works.

Dividends

If you do not pay tax at 40% (see below) then all your dividends or distributions from unit trusts (but not interest) are taxable at the 10% rate only. They form the very last part of your income and so are taxed at your highest rate of tax. If you pay tax at 40% on your other taxable income you will pay tax at 32.50% on your dividends.
Use the link for more information on taxing dividends.

Higher rate tax

Taxable income over £34,370 will be taxed at the 40% higher rate (apart from dividends) whether or not it is savings income.

Tax rates and allowances for those on income over £100,000

For information only we have set the allowances and tax rates for those with incomes over £100,000:

A 50% additional rate of tax applies to taxable income above £150,000 and dividends are taxable at 42.50%. These rates are reducing for 2013/14 so that the 50% tax rate will fall to 45% and the 42.50% dividend rate to 37.50%.
The basic personal allowance is subject to a single income limit of £100,000. Where net income is less than or equal to the £100,000 limit, an individual will continue to be entitled to the full amount of the basic personal allowance.
This also applies to pensioners with incomes in excess of £100,000. The reduction in the personal allowance is no longer restricted to bring allowances down to the basic personal allowance of £8,105.
Where adjusted net income is above the income limit of £100,000, the amount of the personal allowance is reduced by £1 for every £2 above the income limit. The personal allowance will be reduced to nil from this income limit.

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