Savings and tax
Other tax issues
Here, we look in detail at common types of savings income, including bank and building society interest, and dividend income. For a brief overview of the taxation of savings and dividend income check out our factsheet Savings and dividend tax. For information on the Help-to-Save scheme, please see our dedicated page.
What is bank or building society interest?
When you put your money into a bank or building society account, it may earn interest. Interest is money the bank or building society pays you in recognition of the fact that they hold (and have use of) your money.
Interest counts as income for tax purposes on the date it is credited to your account. Most bank and building society income is taxable.
Normally, we might think of ‘income’ as something that is 'earned’ – for example, income from your job or from self-employment – however bank or building society interest is a form of passive (or 'unearned') income. It is taxed differently to earned income.
Most people will have no tax to pay on interest they receive from a bank or building society account due to the ‘personal savings allowance’ (PSA) of £1,000 (or £500 for higher rate taxpayers). Additional-rate taxpayers are not entitled to any PSA. The PSA was introduced from 6 April 2016.
Savings income that falls into your PSA is taxable at 0%, which means you have no tax to pay on it.
Beyond the PSA the basic rate of 20%, the higher tax rate of 40% or the additional rate of 45% may apply, unless the income is specifically tax free. When looking at which rate band may apply to your savings income, you should remember that savings income is treated as the top slice of taxable income, apart from dividend income.
For a basic example of how the PSA works, see Henry.
If you are a Scottish taxpayer, or if you are a Welsh taxpayer, you pay tax according to UK rates and bands on your savings income. For information on how the PSA works for Scottish and Welsh taxpayers, see below.
You should note that income within your PSA is counted as taxable income (albeit taxable at 0%) and so still counts towards your basic or higher rate limits – and may therefore affect things like the amount of PSA that you are entitled to in the first place, the rate of tax that is due on any savings income you receive in excess of this allowance and the rate of tax you pay on dividend income (see What tax rates apply to me? for more information).
In addition, because the income is still counted as taxable income (albeit taxable at 0%) it is counted as income for tax credits purposes. For universal credit purposes, the actual income is ignored and you are deemed to have ‘tariff’ income if your total savings exceeds a certain threshold. For more information, see our page on universal credit.
Please also note that the PSA comes on top of the normal personal allowance and the starting rate for savings (£5,000). These two things taken together mean that anyone with total taxable income of less than £17,500 (for example, from wages, profits, pensions and savings – not including dividends) will generally pay no tax on their bank or building society interest in 2020/21, even without the PSA. The £17,500 figure can be higher if you get blind person’s allowance, marriage allowance or married couple’s allowance.
For an example of how the starting rate for savings interacts with the PSA, see Eric.
You can find a basic government factsheet on the personal savings allowance on GOV.UK.
For a more detailed look at the PSA see our factsheet Savings and dividend tax which also includes examples of how savings income within the PSA uses up the rate bands and how the PSA interacts with the dividend allowance.
Most people with bank and building society interest will not have to pay tax on their savings income due to the PSA. Banks and building societies do not deduct any tax at source from bank interest and it will be paid gross.
The existence of the PSA and the fact that banks and building societies do not deduct tax at source means the tax position for most people who have modest amounts of savings income is straightforward and delivers the right result in the majority of cases. However, it also means that other people may need to notify HMRC about their untaxed, taxable savings interest.
If you do have to pay tax on your bank and building society interest, and if you normally complete a tax return, then you can just include the amount of savings income in the relevant section. If you do not normally complete a tax return, you should tell HMRC about the taxable income. If they can, HMRC will take the extra tax you owe from your wages by changing your Pay As You Earn (PAYE) code. If they cannot adjust your tax code, they may send you a bill at the end of the tax year or ask you to fill in a tax return.
HMRC use information provided to them directly by banks and building societies about any savings interest income you receive. They may use this to send you a bill at the end of the tax year (the P800 form) and/or to amend your tax code. But this will only be for accounts in the name of one individual. Where an account is in joint names, HMRC will not have any information they can use. So, if you have received interest on a joint account, you will need to tell HMRC separately.
As HMRC use bank and building society information, you should check your P800 (or coding notices) carefully to make sure what HMRC are doing is correct – in particular that you have been given the correct PSA and that any estimated figures HMRC have used for your savings income are accurate.
Please note that you should not assume that HMRC will have a similar source of information on all types of income – for example you always need to advise HMRC yourself if you have taxable dividend income.
How much is my personal savings allowance?
For most basic-rate taxpayers, the personal savings allowance is £1,000. We provide further detail here.
What other types of savings income does the personal savings allowance apply to?
As well as interest on bank and building society accounts, the personal savings allowance (PSA) applies to other types of savings income, such as:
- interest from accounts with providers such as credit unions and National Savings and Investments
- interest included in payments of compensation for mis-sold financial products, such as payment protection insurance (PPI)
- interest distributions from authorised unit trusts, investment trusts and open-ended investment companies
- income from corporate bonds and gilts (government bonds)
- income from certain purchased life annuities, profits from deeply discounted securities; profits under the accrued income scheme
- gains from certain life insurance contracts
- foreign interest, unless it is relevant foreign income for remittance basis purposes
Many of these sources of savings income, for example credit union and foreign interest, have always been paid without tax deducted at source. Conversely, other sources have always had tax deducted at source and this will not change.
For example, tax will continue to be deducted automatically from certain forms of savings income such as interest distributions from authorised unit trusts and open-ended investment companies. This is because HMRC think that investors in collective investment schemes are more likely than bank or building society depositors to be higher or additional rate taxpayers, and more likely to receive amounts in excess of the PSA. Tax will also continue to be deducted from interest paid on compensation, for example in the case of mis-selling of PPI, as this is likely to be a large one-off amount and may exceed the PSA.
If the tax deducted at source turns out to be excessive, you may be able to claim the tax back by filling in form R40 (or form R43 if living overseas) and sending it to HMRC. More information about this is available on our page How do I claim back tax on savings income?. We have also published separate guidance on how to claim back tax deducted at source on PPI pay-outs.
If you are unsure as to the extent to which your savings income is taxable, you may need to seek professional advice. We tell you how you can find a tax adviser in our Getting Help section.
My bank account pays ‘rewards’: does the personal savings allowance apply to them?
The PSA applies only to savings income as defined by law. This means that even if you receive income that you think of as savings income, if it is not within the definition, it is not eligible for the PSA. Equally, it is not eligible for the starting rate of savings.
The situation can be very confusing in relation to certain types of ‘reward’ accounts which many banks offer. If you receive any interest (whether on the reward account or on a different account), you should now receive that gross and it will be eligible for the PSA. The treatment of ‘rewards’ however depends on the nature of the reward. It is very possible that you will receive the reward net of 20% tax; in addition, the reward may not be eligible for the PSA. There is often limited guidance available from the bank, and the nature of the reward can vary from account to account.
Please note that we are talking about regular cash rewards here as opposed to cash incentives for people switching their accounts or cashback on certain types of spending, which are generally not taxable as they are considered a 'discount' rather than a reward.
If you have a reward account, to check the tax position, you need to find out the following information:
the type of reward;
whether the bank pays you the reward gross or net of tax (and if net, how much tax is deducted at source);
whether the reward is taxable income; and
whether the reward is potentially eligible for the PSA, depending on your circumstances.
There are three main possible tax treatments, depending on the type of reward:
- If the reward takes the form of interest (that is, a rate based on the account balance), it is savings income and eligible for the PSA. Banks should pay this to you gross without deducting 20% tax at source, but it is still taxable income.
- If the reward takes the form of a cash reward (not related to the account balance), for say depositing a certain amount per month, this is not savings income, but is probably an ‘annual payment’ (applicable even if reward is paid monthly). Banks must deduct tax at 20% before paying you the cash reward, and the gross amount of the cash reward is taxable. Since annual payments are not savings income, these types of reward are not eligible for the PSA (or the starting rate for savings). If you are not liable to tax you can reclaim any tax deducted by completing an R40 form or on your Self Assessment tax return. If you are a higher-rate taxpayer you would need to pay the extra amount to HMRC, for example, via a PAYE coding adjustment or through your tax return.
- If the reward takes the form of a cash reward (not related to the account balance) and there is a fee for the account, the reward does not meet the conditions for an annual payment. It is still taxable, however as a 'miscellaneous payment'. Banks do not have to deduct tax before paying you the cash reward, so you receive these rewards gross and the gross amount is taxable. These types of reward are not savings income, so they are not eligible for the PSA (or the starting rate for savings). If you are a basic, higher-rate or additional-rate taxpayer you would need to pay any tax due to HMRC, for example, via a PAYE coding adjustment or through your tax return.
If you have a cash Individual Savings Account (ISA), the interest you get is tax free. ISA income does not count towards the PSA.
There are also a number of NS&I products, backed by the Treasury, which are expressly free of tax, for example, fixed interest and index-linked National Savings Certificates and Premium Bonds. Income or prizes from these products do not count towards the PSA either.
You can find more information about NS&I products on the NS&I website.
How does the personal savings allowance apply to a joint account?
Both account holders are entitled to a personal savings allowance, to use against their share of the interest.
You can save tax free with Individual Savings Accounts (ISAs).
There are two main types of ISA for you to choose from: cash, in which interest is tax free, and stocks and shares in which dividends on or any capital growth in the stocks and shares are tax free.
You do not need to tell HMRC about income you get from ISAs. ISA income does not count towards the new personal savings allowance or dividend allowance. There is more on ISAs on GOV.UK including information on eligibility for an account.
Since 6 April 2016, interest and gains from qualifying peer to peer loans are eligible for ISA tax advantages in an Innovative Finance Individual Savings Account.
The Lifetime ISA is another type of ISA. Introduced from 6 April 2017, it aims to help savers under 40 build a deposit for their first home or save until age 50 for retirement (drawing on the savings from age 60), with penalties if used for other purposes other than by the terminally ill. The government will pay a tax-free bonus of £1 for every £4 saved, so somebody who saves the maximum £4,000 a year will get £1,000 on top (this is the same amount as you might get in tax relief if you put £4,000 into a pension). You can find detailed technical guidance on the Lifetime ISA on GOV.UK.
As a result of the coronavirus pandemic, the government announced that withdrawal charges for Lifetime ISAs are to be temporarily reduced for withdrawals made during the 11-month period of 6 March 2020 to 5 April 2021. See Coronavirus: Taking money from your savings.
Across all types of ISAs (except Junior ISAs), the maximum you can put in in 2020/21 is £20,000. The £4,000 limit for the Lifetime ISA, if used, forms part of your overall £20,000 annual ISA limit.
Note that child trust funds which will start to mature from September 2020 may be transferred into an ISA without reducing that individual’s annual ISA subscription limit.
If you are interested in opening a Lifetime ISA, interactions with means tested benefits should be considered and you should make sure you understand when you can take your money out and for what purpose.
You may be interested in a report by LITRG Senior Technical Manager, Kelly Sizer, on The complexities of government-incentivised savings schemes for people on low incomes (October 2017). The report looks at these issues in detail across a number of government incentivised schemes, including pensions auto-enrolment, Lifetime ISAs and Help-to-Save. For a summary of the key points, please see our article Solving the savings conundrum.
Please note that special rules apply where your spouse or civil partner dies and they had ISA holdings at their date of death. See our bereavement guidance for more information.
There are also Junior cash ISAs and Junior stocks and shares ISAs for children under 18 years old. A child can have both types of Junior ISA, provided they do not exceed the annual Junior ISA allowance (£9,000 for 2020/21).
Help-to-Buy ISAs were introduced from 1 December 2015 and could be opened until 30 November 2019. They are a type of ISA designed to help first-time buyers save up for a deposit for their new home with the government adding a tax-free bonus of up to 25% to all money saved (provided you save a minimum of £1,600, up to a maximum bonus of £3,000). The maximum monthly deposit is £200 each calendar month. It was possible to deposit an additional £1,000 when the account was first opened.
If you have a Help-to-Buy ISA, you can transfer those savings into a Lifetime ISA or you can continue to save into both. However, you can only use the bonus from one of the ISAs to buy a house. Furthermore, from 2018/19, if you transfer Help-to-Buy ISA savings into a Lifetime ISA they will count towards the £4,000 contribution limit (they did not if the transfer was made in 2017/18).
Finally, although not an ISA as such, a government-incentivised savings scheme, Help-to-Save, was introduced in September 2018 and is aimed at supporting people on low incomes to build up their savings. Over four years, regular savers can deposit up to £50 a month and receive up to £1,200 in tax-free government bonuses.
For more information on who Help-to-Save is for and how it works, see our separate guidance.
A credit union is a financial co-operative. They were traditionally owned and run by members who have a common interest, such as where they live or work; but these days, some have broader membership rules.
Numbers of credit union members have been rising and it is likely that much of this growth is coming from the scores of employers who are partnering with credit unions and facilitating employee savings via payroll deductions.
From October 2019, some credit unions have been piloting a new ‘win while you save’ account known as a PrizeSaver account. It is possible to win up to £5,000 a month by saving from just £1 a month into these accounts. HMRC have confirmed to us that the winnings paid in these accounts are not treated as taxable income and can therefore be ignored for income tax purposes. However, please note the winnings will be treated as capital for universal credit and your universal credit award would be affected if your total capital exceeds £6,000. If you are in receipt of any tax credits or benefits, you should check with the relevant department to confirm how any prize is treated for that specific benefit.
Other than this PrizeSaver account, returns on credit union savings may be by way of a ‘dividend’ or interest. Both types are treated as interest income for tax purposes despite the first being called a ‘dividend’. Credit unions do not have to deduct any tax at source from savings income. Credit union savings income falls within the scope of the PSA.
If you invest in shares in a company, there are two ways you can earn money. They can grow in value, allowing you to make a gain when you sell them. Companies also distribute the profits they make in the form of a dividend. This is known as dividend income.
The availability of a dividend allowance means that people do not have to pay tax on the first £2,000 of their dividend income. Introduced in 2016/17, the dividend allowance (now £2,000, reduced from £5,000 in 2016/17 and 2017/18) is available to anyone who receives dividend income (including foreign dividends unless they are relevant foreign income for remittance basis purposes) – no matter how much non-dividend income they have.
To the extent that dividend income falls into your dividend allowance, it is taxable at 0%, which means you have no tax to pay on it.
Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1% on basic, higher and additional rate taxpayers respectively. When looking at which rate band may apply to your dividend income, you should remember that dividend income is treated as the top slice of taxable income.
If you are a Scottish taxpayer, or if you are a Welsh taxpayer, you pay tax according to UK rates and bands on your dividend income. For more information on how the dividend allowance works for Scottish and Welsh taxpayers, see below.
Taxpayers are not required to notify HMRC of their dividend income if dividends fall within the dividend allowance. However, taxpayers whose dividends are not covered by the dividend allowance have an obligation to notify a liability to pay tax to HMRC (those in Self Assessment should just include the amount of dividend income in the relevant section).
Please note that income that is within your dividend allowance is counted as taxable income (albeit taxable at 0%) and so counts towards your basic or higher rate limits and may therefore affect the amount of PSA that you are entitled to and the rate of tax you pay on dividend income that exceeds your allowance (see What tax rates apply to me? for more information).
In addition, because the income is still counted as taxable income (albeit taxable at 0%) it is counted as income for tax credit purposes. For universal credit, dividend income is ignored and your shares are treated as capital. If you have total capital in excess of a certain threshold, you are deemed to have ‘tariff’ income. Please see our page on universal credit for more information.
There is more information about the dividend allowance, including some examples, in the factsheet on GOV.UK.
For a more detailed look at the dividend allowance see our factsheet Savings and dividend tax which also includes examples of how dividend income within the dividend allowance uses up the rate bands and how the dividend allowance interacts with the personal savings allowance.
I give to charity under Gift Aid, is there anything I should note about the personal savings allowance and dividend allowance?
Many people do not pay tax on their savings and dividend income due to the personal savings and dividend allowances. This might mean that you have not paid enough tax to cover the tax that a charity can reclaim if you made Gift Aid donations.
If you donate to charity under a Gift Aid declaration, the charity will still assume the donation has come from someone paying tax and claim an amount back from HMRC. You might then be faced with a bill from HMRC for the amount they have claimed.
This could mean that you need to consider your tax position carefully before you sign up to a Gift Aid declaration (or continue with regular donations under Gift Aid). Check your tax position each year to make sure you pay enough tax to cover the tax element of your donation.
If you do not pay enough tax to cover this, you can still donate to charity, but the charity cannot claim Gift Aid relief from HMRC. You should also bear this in mind when visiting attractions, which invite you to Gift Aid your ticket entry.
Members of a married couple or a civil partnership are taxed separately so each spouse or partner is potentially entitled to a personal allowance, a personal savings allowance, a dividend allowance, etc. In order to take best advantage of being taxed separately, it may be sensible to transfer savings or shares to your partner as this can save tax on the attributable interest or dividends if you are part of a couple where one person has spare capacity in their allowances or is in a lower tax band than the other.
To take best advantage of being taxed separately, it may be sensible for tax purposes to transfer savings or shares to your partner as this can save tax on the attributable interest or dividends if you are part of a couple where one person has spare capacity in their allowances or is in a lower tax band than the other. You will need to bear in mind, however, that transferring legal ownership of property to your spouse or civil partner might have other impacts – for example, the revised ownership might be taken into account on a separation or divorce. If you are concerned about these other impacts, you should take legal advice.
Also, if you transfer shares to your partner, this is a disposal for capital gains tax purposes. If you are not married or in a civil partnership when the shares are transferred, there may be capital gains tax to pay on the transfer. There will be no capital gains tax to pay if you are transferring (that is, gifting) a cash balance in pounds sterling, whether or not you are married or in a civil partnership.
If you have savings or shares held in joint names between you and your spouse or civil partner, by default 50% of the income (that is, the interest or the dividends) arising is treated as taxable on you and the other 50% is taxable on your spouse or civil partner. This is the case even if the underlying beneficial entitlement is unequal (for example, if only one spouse or civil partner funds the savings account or purchases the shares). However, you may both elect, on form 17, to be taxed in accordance with your respective beneficial interests instead, if these are unequal. The election is irrevocable and may only be backdated 60 days.
By contrast, note that joint owners of property (such as a joint bank account or jointly-held shares) who are not married or in a civil partnership, or in partnership, are taxed on the share to which they are entitled. In most cases this will be 50:50, even if contributions to the account are unequal.
There is more information about the tax consequences of entering into a marriage of civil partnership in our news article, Thinking of entering into a civil partnership? Make sure you understand the tax consequences – both positive and negative!.
If you are a Scottish taxpayer, you can find out more about Scottish income tax in the tax basics section.
Scottish rates and thresholds apply to non-savings and non-dividend income only; a Scottish taxpayer pays income tax according to the UK rates and bands on their savings and dividend income.
Therefore, a Scottish taxpayer who has both earned income, such as employment salary, pension, profits from self-employment or rental profits, and taxable savings income, such as bank interest may have to consider both the UK rates and thresholds and the Scottish rates and thresholds in order to work out their income tax liability.
There is an example of how this may affect you if you are a Scottish taxpayer in the tax basics section.
In 2020/21, Welsh taxpayers pay the same income tax as taxpayers in England and Northern Ireland. For more information, see What is Welsh income tax?.
How do the personal savings allowance and dividend allowance interact with the taxation of state pension lump sums?
If you have deferred claiming your state pension, having reached state pension age before 6 April 2016, when you do decide to take your state pension you may be able to claim a state pension lump sum.
If you do take such a lump sum, when working out what rate of tax you should pay on it, the special rates that are used to tax savings income and dividend income falling within the basic rate band – the starting rate for savings, personal savings allowance and dividend allowance are ignored.
Therefore, if your total taxable income falls within the basic rate band (even if some of that income is taxed at 0% due to it being taxed at 0% savings and dividend rates), you will pay tax at 20% on your state pension lump sum.
Please see What tax do I pay on my state pension lump sum? for more information.
HMRC have written to me about money I have invested offshore – what should I do?
You may have received a letter saying that HMRC’s information indicates you currently have or previously had offshore income or gains, and if you have additional tax to pay, to tell HMRC using the Worldwide Disclosure Facility. If this applies to you, we strongly recommend you seek advice as HMRC may seek to charge harsh penalties for the non-compliance.
Life insurance is something you might come across if you are looking into tax-efficient savings and investment options. Some life insurance is designed to be an investment – a place to store and grow your money rather than just pay out when you die. The life insurance companies invest your money and when your investment matures, it will typically pay out a profit. Insurance policies are either qualifying or non-qualifying.
Qualifying policies are generally long-term policies where regular sums are paid in. There is typically no tax when a qualifying policy matures. Please see the website of the Money Advice Service for more information on qualifying policies.
Non-qualifying policies tend to be policies which are funded by a single premium rather than regular contributions. They are much more likely to give rise to tax consequences when they mature. We explain how to work out if tax on non-qualifying policies due in our pensioners section.
Henry earns £25,000 and has savings income of £600. He has to pay tax at 20% on £12,500 of his earnings (the amount left once his £12,500 personal allowance is used) however his savings income is tax free due to his £1,000 personal savings allowance.
If his savings income was £1,250 instead of £600, he would have 20% tax to pay on £250. As tax is no longer collected at source on interest, he will have to pay this £50 to HMRC another way – most likely by having his tax code adjusted.
John (not a Scottish taxpayer) has total income of £50,001 in 2020/21. Of this, £1,000 is savings interest. Since his total income means that he is a higher rate taxpayer, he is entitled to a savings allowance of £500.
His savings income is taxed as follows:
£500 @ 0% = £0
£499 @ 20% = £99.80
£1 @ 40% = £0.40
Total tax on savings interest of £100.20
James (not a Scottish taxpayer) has total income of £50,000 in 2020/21. Of this, £1,000 is savings interest. Since his total income means that he is a basic rate taxpayer, he is entitled to a savings allowance of £1,000.
His savings income is taxed as follows:
£1,000 @ 0% = £0
Total tax on savings interest of £0
Thus, a £1 increase in income produces an additional tax liability of £100.20.
Eric (not a Scottish taxpayer) has earned income of £15,000, savings income of £4,000 and dividend income of £2,000 in 2020/21.
He has to pay tax at 20% on £2,500 of his earnings (the amount left once his £12,500 personal allowance is used). He has £2,500 of the starting rate for savings band available as his earned income is less than £17,500. So, the first £2,500 of his savings income is taxable at 0%. As his adjusted net income is £21,000, his personal savings allowance is £1,000. This means that he has a tax rate of 0% on a further £1,000 of his savings income. He must pay tax at 20% on the remaining £500 of his savings income, which is £100. He does not have to pay any tax on his dividend income as it falls within his dividend allowance of £2,000. As tax is not deducted at source from savings interest, Eric will have to pay the £100 tax to HMRC another way.
The above example can be represented as follows:
|Earned income (£)||Savings income (£)||Dividend income (£)|
|Less: Personal Allowance||(12,500)|
|Tax thereon:||2,500||@ 20%||500|
|Starting rate for savings||2,500||@ 0%||0|
|Personal savings allowance||1,000||@ 0%||0|
|Dividend allowance||2,000||@ 0%|
If Eric has earned income of £15,000, savings income of £4,000 and dividend income of £32,000, he has to pay tax at 20% on £2,500 of his earnings (the amount left once his £12,500 personal allowance is used). He has £2,500 of the starting rate for savings band available as his earned income is less than £17,500.
So, the first £2,500 of his savings income is taxable at 0%. As his adjusted net income is £51,000, his personal savings allowance is £500. This means that he has a tax rate of 0% on a further £500 of his savings income. He must pay tax at 20% on the remaining £1,000 of his savings income, since it falls into the basic rate band – £200 tax. He does not have to pay tax on £2,000 of his dividend income as it falls within his dividend allowance. He must pay tax at 7.5% on £29,000 (within the basic rate band) (£2,175 tax) and at 32.5% on £1,000 (within the higher rate band) (£325 tax) of his dividend income.
As tax is not deducted at source from savings interest, Eric will have to pay the £200 tax on his savings interest and the £2,500 tax on his dividend income to HMRC another way.
Again, the above can be represented as follows:
|Earned income (£)||Savings income (£)||Dividend income (£)|
|Less: Personal Allowance||(12,500)|
|Tax thereon:||2,500||@ 20%||500|
|Starting rate for savings||2,500||@ 0%||0|
|Personal savings allowance||500||@ 0%||0|
|Dividend allowance||2,000||@ 0%|
Liz has a pension of £20,000 and receives dividends of £1,500.
She has to pay tax at 20% on £7,500 of her pension (the amount left once her £12,500 personal allowance is used). However, her dividend income is tax free as it is less than the dividend allowance.
If Liz received dividends of £12,000 instead, the £2,000 dividend allowance would apply to some of her dividends leaving the remaining £10,000 to be taxed at 7.5%. Liz would have tax of £750 to pay on the dividends and would need to contact HMRC to arrange payment. As her dividends in this case are over £10,000, it is likely that HMRC will ask her to complete a tax return.
Mr Chang purchases an investment bond for £10,000. He takes annual withdrawals of 5% each year for six years, totalling £3,000. There is no tax on the withdrawals at the time he makes them. Several years later he cashes in the bond for £11,800. However, the profit liable to tax is not £1,800 but £4,800 – because the £3,000 withdrawals are added into the gain calculation made when his policy ends.
If Mr Chang exceeded the 5% rule in one of the six tax years by taking out £1,000 instead of £500, then this ‘excess withdrawal’ of £500 would have been treated as taxable income on him for the year in question. If Mr Chang’s bond was an onshore bond, the £500 excess withdrawal would have carried a 20% unreclaimable tax credit, meaning he would only have had to pay tax on it if he was a higher or additional rate taxpayer. There would have been no such credit for an offshore bond.
Tom is a 40% taxpayer. His taxable income for 2020/21 is £52,000. He also makes two gains on life insurance policies he cashed in during the year. The Profitable Insurance Company has sent certificates to Tom showing what profits he made.
The gains amounted to £10,000 on each policy so Tom will need to pay extra tax of £4,000, worked out as £20,000 @ 20% (40% - 20%).
You can find out more about savings and tax in the HMRC savings manual.
For more information on how PPI pay-outs are treated for tax and tax credit purposes, see our news article Had a PPI claim and on a low income? If so, read this.