Tax on savings income
Savings income (which includes all types of interest) from most deposit takers (banks and building societies) is paid without deduction of tax. This does not apply to interest paid on loans to your company.
For 2018/19 there is a personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers; within this band the savings income is taxed at 0%. There is an additional £5,000 band of 0% tax known as the savings starting rate, which is available to taxpayers with very low non savings income.
For higher rate taxpayers, there is the question of how much of their savings income has to bear extra tax. In determining this, the general rule is that savings income is treated as the 'top slice' of income, with dividends being the 'top slice' of savings income, although the terms savings income and dividend income are treated as separate for the purpose of tax rates.
This is best illustrated by examples of individuals who have exactly the same savings income in 2018/19, but different other income (for simplicity, treated as being after application of all allowances). The treatment of dividends is more complicated and they are therefore excluded.
Suppose the savings income is received as follows:
|Building society interest||£4,000|
|Mr Black||Mr Smith||Mr Brown||Mr Green|
|Other taxable income||£1,000||£10,000||£32,500||£145,000|
|Total taxable income||£7,000||£16,000||£38,500||£151,000|
Mr Black is a basic rate taxpayer, so the first £1,000 of savings income is tax free. His taxable non-savings income of £1,000 utilises part of the savings income starting rate band. So £4,000 of the savings income is taxed at 0% and the remaining £1,000 is taxed at 20%, giving a total tax bill on his savings income of £200.
Mr Smith's total taxable income is below the higher rate threshold of £34,500 so his personal savings allowance is similarly £1,000. The remainder of his savings income will be taxed at 20%. The 10% starting rate does not apply as the taxable non savings income exceeds £5,000.
Mr Brown's total taxable income exceeds the higher rate threshold by £4,000, so his personal savings allowance is £500. The balance of his savings income is taxed at 20% (on £2,000) and 40% (£3,500). His tax on his savings income totals £1,800.
Because Mr Green's taxable income exceeds the additional rate threshold, his personal savings allowance is zero. His savings income is therefore charged at 40% (£5,000) and 45% (£1,000), bringing total tax on savings income to £2,450.