Savings and investments Taxation In The UK
Tax on bank and building society accounts
Savings interest normally has tax taken off at 20 per cent before you receive it. If you’re a higher rate (40 per cent) taxpayer, you owe tax on the difference. If you have a low income you may be able to claim tax back.
How you pay tax on savings income
Savings income is added to your other income and taxed after your tax free allowances – for example Personal Allowance – have been taken into account, as follows:
- savings income that falls within the £2,440 starting rate for savings Income Tax band is taxed at 10 per cent – though in most cases it’s likely to be above this limit, as it’s added to your other income
- savings income that rises above the £2,440 starting rate for savings Income Tax band, but falls within the £37,400 basic rate Income Tax band, is taxed at 20 per cent
- savings income that rises above the £37,400 Income Tax band is taxed at 40 per cent
- if it falls on both sides of a tax band, the relevant amounts are taxed at the rates for each tax band
All of the above figures apply to the 2009-2010 tax year.
You pay tax on your interest in the tax year that the interest is paid to you (or credited to your account) even if part of it has accrued in previous tax years.
Tax deducted from interest before you receive it
Savings income normally has 20 per cent tax taken off before you receive it. This is confirmed by the entry ‘net interest’ on your bank or building society statement.
If the entry shows only ‘gross interest’ -and no ‘net interest’ – then no tax has been deducted. You normally have to register to receive interest gross – for more on this see ‘If you’re a non-taxpayer’ in the section below.
Reclaiming or paying extra tax on savings interest
If you’re a non-taxpayer
If your level of income means that you don’t need to pay tax, you can complete a form R85 Getting your interest without tax taken off. If you’ve already had tax taken off your interest, you will be able to claim it back.
If the starting rate for savings (10 per cent) applies to you
The rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account. So if your non-savings income is less than the starting rate for savings limit £2,440 - or if savings and investments are your only source of income – your savings income is taxable at the 10 per cent starting rate up to the limit.
However, your interest will have been taxed at 20 per cent so you will be able to claim part of the tax back.
If you’re a basic rate (20 per cent) taxpayer
If you’re a basic rate taxpayer you don’t need to take any action. No extra tax is due.
If you’re a higher rate (40 per cent) taxpayer
If you’re a higher rate taxpayer you must let your Tax Office know what interest you have received so that they can collect the extra tax due:
- if you normally complete a Self Assessment tax return you’ll need to declare your savings income on your return
- if you completed a tax return during the 2008-2009 tax year, but now pay your higher rate tax through PAYE (Pay As You Earn), the extra tax due on your savings will also be collected through PAYE based on the latest information HMRC have
- if you no longer complete tax returns HMRC may send you a form P810 Tax Review, normally issued every three years, to check on your level of savings and other untaxed income, and then adjust your tax code (or ask you to complete a tax return if necessary)
- if you don’t normally complete a tax return but have recently moved into the higher rate Income Tax band, you must contact your Tax Office and let them know what savings income you receive – they will either ask you to complete a return, or if you’re employed or receiving a pension may arrange to collect the extra tax due through PAYE
Thereafter you will be sent a form P810 to check on your level of savings.
If your savings or other income changes significantly
Whatever your current Income Tax band, if you don’t normally complete a tax return and there is a significant change to your savings or other income, you must contact your Tax Office right away so that they can work out whether you need to pay extra or less tax. By contacting them early on you can:
- prevent a build up of tax owed if your income takes you into a higher band
- avoid paying too much tax if your income has fallen below certain limits
Declaring savings interest on your tax return
If you complete a tax return you’ll need to show (for your combined bank/building society savings):
- the amount of interest you received after tax was deducted – the ‘net amount’
- the amount of tax deducted ‘at source’ before you received the payment
- the sum of the two above – the ‘gross amount’ (before tax)
There are three separate boxes for this information.
There’s also a separate box to complete for any interest you received without tax deducted.
Your bank/building society may send you a ‘Certificate of Tax Deducted’ or a statement containing this information after the end of each tax year (April 5). If you need one but haven’t received one, just ask. You can also often get the figures you need from your passbook or from your statements of account.
If you have a joint account with a husband, wife or civil partner you should declare half of the income as yours. The second half should count towards their income.
Tax-free savings interest from ISAs
Interest from cash ISAs is tax-free. As a result no tax is deducted at source.
Tax on foreign savings and investment income
If you receive savings and investment income from abroad, you’ll usually need to declare this on a Self Assessment tax return. You may have to pay UK Income Tax, but if you’ve paid foreign tax on the income you may be able to offset (deduct) this.
What counts as overseas income?
Income counts as ‘overseas income’ if it comes from outside England, Scotland, Wales and Northern Ireland. So income from the Channel Islands and the Isle of Man counts as overseas income too.
Overseas savings and investment income includes:
- interest from overseas bank or building society accounts
- dividends and interest from overseas companies
- rent from overseas properties
If you’ve already paid tax in the country of origin
If you find that you’re being asked to pay tax both in the country of origin and in the UK, you may be able to claim relief from double taxation by completing the foreign pages section of the tax return. The UK has signed many double taxation agreements with other countries. These are arrangements that aim to prevent double taxation.
How much foreign relief will you get?
You’ll get relief on the lower of:
- the minimum foreign tax payable under the terms of the agreement
- the maximum amount of UK tax due
So if the foreign tax you’re due to pay is more than that payable as UK tax, you’ll still only get relief on the amount of UK tax payable.
Even if there is no double taxation agreement between the UK and the other country, relief may still be given for the foreign tax payable (called ‘unilateral relief’). Your Tax Office will help you if you need further advice.
Foreign tax on dividends and interest
Double taxation agreements usually set out a rate of tax (called ‘withholding tax’) that a country can charge on a UK resident receiving certain types of income from that country – for example, dividends from companies or interest on savings.
Any claim that you make for relief against UK tax must be restricted to this minimum tax payable under the relevant double taxation agreement. You can find a list of these rates in the notes to the foreign pages of the tax return.
If you’ve paid foreign withholding tax at a higher rate than is listed for that type of income, you’ll need to approach the overseas tax authority for a refund of the tax paid above the agreed rate.
Rent from overseas property
If UK tax is due on rental income from an overseas property, you can deduct certain expenses and allowances in the same way as you can from income from UK property.
You can claim relief for tax paid in the other country in the foreign pages section of the tax return.
Reporting your overseas income
You must report your overseas income on the foreign pages of your tax return.
Effect of residence, ordinary residence and domicile on your tax liability
It’s possible that you may not have to pay tax on your overseas income. This will depend on whether you are classed as ‘resident’ in the UK for tax purposes in a tax year. The amount of income on which you pay tax may also be affected by whether you are treated as having an ‘ordinary resident’ status in the UK and your country of ‘domicile’.
You can read more about how your residence, ordinary residence and domicile can affect the UK taxation of income from your overseas investments and savings interest on the HM Revenue & Customs (HMRC) website.
Tax on buying shares
When you buy UK shares you pay a tax on the transaction. This is called Stamp Duty Reserve Tax (SDRT) for ‘paperless transactions’ and Stamp Duty for transactions using a stock transfer form.
Stamp Duty Reserve Tax
When you buy existing shares through a stockbroker, the transaction is usually completed electronically through CREST (the electronic settlement and registration system). This is known as a paperless transaction.
How SDRT is worked out
You pay SDRT on paperless transactions for UK shares at a flat rate of 0.5 per cent. But this is based on what you give for the shares – not what they’re worth.
This means that:
- if you buy shares for £1,000 you’ll pay £5 SDRT whatever the value of the shares themselves - SDRT charges are rounded up or down to the nearest penny
- if you don’t pay cash but give something else of value in return for the shares, the SDRT’s based on the value of what you give for them
- if you’re given shares for nothing, you don’t have to pay any SDRT
Share, share options, rights and interests
You pay SDRT when you buy existing shares in a company incorporated in the UK, or in a foreign company that maintains a share register in the UK, and also when you buy:
- an option to buy shares
- rights arising from shares, like the rights under a rights issue
- an interest in shares, like an interest in the money from selling them
If you subscribe for new shares in a company, stamp duty is not payable.
If you buy units in a unit trust, or invest in an ‘open ended investment company’, the trust or the company pays the SDRT and they take this into account when setting the price at which they’ll sell to you.
Stamp Duty on transfers using paper forms
If you use a stock transfer form when you buy shares, then it’s a paper transaction. You pay Stamp Duty on paper transactions, not SDRT. Stamp Duty is payable on the same sorts of transaction and at the same 0.5 per cent rate as SDRT, but the duty is rounded up to the nearest £5 above.
However if you buy shares for any amount of consideration up to £1,000 no stamp duty will be payable. If the consideration is £1,050, the duty will be £10. If you’re given shares for nothing, you don’t have to pay any Stamp Duty.
Higher rate of SDRT or Stamp Duty for special share arrangements
You’ll have to pay SDRT or Stamp Duty at a higher rate of 1.5 per cent if you transfer shares into a ‘depositary receipt scheme’ or a ‘clearance service’. These are special arrangements where the shares are held by a third party and can be traded free of stamp duty or SDRT. (With some clearance services the higher rate isn’t charged and stamp duty or SDRT is payable in the normal way when shares are traded.)
How SDRT and Stamp Duty are paid
Most share transactions are paperless transactions, which are completed electronically through CREST. CREST automatically deducts the SDRT and sends it to HM Revenue & Customs (HMRC). Your stock broker will settle up with CREST for the cost of the shares and the SDRT and then bill you for these and the broker’s fees.
If you don’t buy shares through CREST you pay the Stamp Duty to HMRC yourself.
SDRT is already accounted for in the price you pay for units in Unit Trusts or shares in open-ended investment companies.
Tax on buying foreign shares
You don’t have to pay UK Stamp Duty or SDRT if you buy foreign shares. But there may be foreign taxes that you’ll have to pay.
Enquiries about SDRT
If you have any questions about SDRT you can phone HMRC on 0845 603 0135 between 8.30 am and 5.00 pm, Monday to Friday – closed on Bank Holidays.
Tax on UK dividends
You pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on other income including wages, profits from self-employment, pensions and interest from savings, such as bank and building society interest.
Dividend tax rates 2009-2010
There are two different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic rate Income Tax limit.
The basic rate Income Tax limit is £37,400 for the 2009-2010 tax year.
| Dividend income in relation to the basic rate tax band | Tax rate applied after deduction of personal allowance and any blind person’s allowance |
|---|---|
| Dividend income at or below the £37,400 basic rate tax limit | 10% – the dividend ordinary rate |
| Dividend income above the £37,400 basic rate tax limit | 32.5% – the dividend upper rate |
It doesn’t matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way.
But bear in mind that interest distributions from unit trusts and open-ended investment companies are taxed at the rates for savings income – see below.
Tax on savings income
There are two main Income Tax rates on savings income: 20 per cent (the basic rate) or 40 per cent (the higher rate). The rate(s) you pay depends on your overall taxable income. Depending on your personal circumstances, some of your savings income may be taxable at the special 10 per cent starting rate for savings.
How dividends are paid
When you get your dividend you also get a voucher that shows:
- the dividend paid – the amount you received
- the amount of associated ‘tax credit’ - see next section
If you have agreed to get your dividends paid electronically you may get your dividend voucher in paper or electronic form.
Understanding the dividend tax credit
Companies pay you dividends out of profits on which they have already paid – or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.
When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.
How tax credits are worked out
The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the ‘dividend income’.
Dividend income at or below the £37,400 basic rate tax limit
| Dividend paid to you (represents 90% of the dividend income) | Tax credit (10% of the dividend income) | Dividend income (dividend paid plus tax credit) |
|---|---|---|
| £63 | £7 | £70 |
| £54 | £6 | £60 |
| £90 | £10 | £100 |
Paying tax on dividend income
If you pay tax at or below the basic rate
You have no tax to pay on your dividend income because the tax liability is 10 per cent – the same amount as the tax credit – as shown in the earlier tables.
If you pay tax at the higher rate
You pay a total of 32.5 per cent tax on dividend income that falls above the basic rate Income Tax limit (£37,400 for the tax year 2009-2010). But because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5 per cent.
Note that dividend income, like savings income, is taxed after your non-savings income - for example, wages and self-employment profit - at your highest tax rate. If it falls both sides of the £37,400 higher rate tax bracket, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).
Can you claim the tax credit if you don’t normally pay tax?
No. You can’t claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don’t pay tax. This is because Income Tax hasn’t been deducted from the dividend paid to you – you have simply been given a 10 per cent credit against any Income Tax due.
Declaring dividend income on your Self Assessment tax return
If you normally complete a tax return you fill in three boxes:
- the ‘dividend/distribution’ – the actual amount you were paid
- the tax credit – as shown on the dividend voucher
- the total of these two – the ‘dividend income’
You pay any extra tax owing via either Self Assessment or PAYE (Pay As You Earn), depending on how you normally pay tax.
Tax on the sale of shares
If you make total ‘gains’ (profits) above a certain level when you dispose of assets, including shares, you may have to pay Capital Gains Tax (CGT). Special rules apply for identifying shares acquired in the same company at different times – to ensure you work out the correct gain or loss.
Working out whether you have to pay CGT
Whether or not you need to pay CGT when you dispose of shares depends on your total gains for the tax year. This includes the gain on the shares and gains on the disposal of any other assets that attract CGT.
CGT is charged on total gains after:
- deduction of the costs of acquisition and disposal of each asset
- taking into account any reliefs that affect the amount of a gain – some apply automatically, others have to be claimed
- deduction of allowable losses arising from the disposal of other shares or assets
- applying ‘taper relief’ – this may reduce the taxable gain on an asset depending on the nature of the asset and how long you’ve held it
- deducting from the total taxable gains left the ‘Annual Exempt Amount’ (AEA) – for the tax year 2008-09 this is £9,600
How much CGT will you pay?
This depends on your overall income.
To find out how to calculate CGT, including illustrative examples and check which other assets attract CGT, read our related article.
Special rules for working out gains on shares
Shares differ from most other assets that attract CGT because they’re not uniquely identifiable. You may buy shares of the same class in one company at different times and at different prices. As a result you have to apply special rules when working out their acquisition cost for CGT purposes.
Shares through an employee share scheme
Special CGT rules apply to shares bought or acquired through an employee share scheme. HM Revenue & Customs (HMRC) approved schemes, such as Share Incentive Plans, approved Save As You Earn (SAYE) schemes, Company Share Option Plans and Enterprise Management Incentives offer tax advantages.
Reporting the sale of shares and paying CGT
If you normally complete a Self Assessment tax return
You must fill in the CGT pages of your return if any of the following apply:
- CGT is due
- you wish to claim an allowable loss or a relief or to make an election
- the total value of all your disposals that attract CGT is above four times the AEA – whether or not you made gains
- you deduct losses and your gains before deducting losses and applying taper relief are greater than the AEA
- no losses are deducted, but the gains after taper relief are more than the AEA
If you don’t tell your Tax Office about gains that should be included on your tax return you may be liable to financial penalties and/or prosecution.
Ordering the CGT pages
- if you complete the full paper tax return you can download the pages from the HMRC website, or use the online ordering service – see ‘More useful links’
- if you complete the short paper tax return ask your Tax Office for form SA200CG or use the online ordering service – see ‘More useful links’
- the CGT pages aren’t currently available with HMRC’s Self Assessment Online software – you’ll need to complete a paper tax return instead
- if you use commercial software the pages may be available
If you don’t normally complete a tax return but CGT is due
- write to your Tax Office and supply your CGT calculations – they may send you a bill, or ask you to complete a tax return
- if you don’t tell your Tax Office that you have CGT liability within six months after the end of the tax year, you may have to pay a penalty
Selling or giving shares to your spouse, civil partner or children
You don’t have to pay CGT if you sell or give shares to your husband, wife or civil partner while you’re legally married or in a civil partnership and living together. But if they later sell or give away the shares, they may have to pay CGT on the gain – based on their original cost to you.
There’s no special relief if you sell or give shares to your children.
Giving away shares or selling them for less than they’re worth
If you give shares away – so you get nothing for them – your gain is based on what they’re worth. It’s the same when you sell them for less than their full value. So you need to work out the gain based on the full value of the shares when you gave them away.
Tax efficient savings and investments
If you save or invest money, you’ll generally have to pay tax on the interest or income you get, but there are some savings and investments that give you a tax-free return. If you’re on a low income, you might not have to pay tax at all.
ISAs (Individual Savings Accounts)
ISAs are tax favoured savings and investment accounts. You can use them to save cash, or invest in stocks and shares. The maximum you can put in to an ISA is £7,200 in each tax year.
You don’t pay any tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax. But this does mean that you can’t use losses on ISA investments to reduce Capital Gains Tax on profits from investments outside the ISA.
National Savings & Investments
National Savings and Investments offer a totally safe way of saving and investing money because it’s backed by the Treasury.
Tax-free savings and investment products from National Savings and Investments currently include:
- Cash mini ISA – for savers aged 16 or over
- Fixed Interest and Index Linked Savings Certificates – for savers aged seven or over
- Children’s Bonus Bonds – can be invested for five years on behalf of children aged under 16
National Savings and Investments also issue Premium Bonds. If you buy Premium Bonds, you won’t get interest, but you can win tax-free prizes.
Child Trust Fund
If your child was born on or after 1 September 2002 is awarded Child Benefit, you’ll get a £250 voucher from the government – and an extra £250 payment if your income is below a certain level – to set up a Child Trust Fund account. Once you’ve opened a Child Trust Fund account parents, family and friends can add up to £1,200 to the account each year.
Neither you, nor your child will pay tax on any income or any gains in the account until your child reaches age 18.
Tax-free interest on bank and building society accounts
Banks and building societies usually take tax off interest at the rate of 20 per cent before they pay it to you. But if your taxable income is less than your tax allowances you can register to have your interest paid ‘gross’ (without tax taken off). If you’re under 16, your parent or guardian will have to register for you. You can also claim back tax you’ve paid on your savings when you didn’t need to.
Follow the links below to check the detail and next steps.
Tax relief on pension savings
The government encourages you to save for your retirement by giving you ‘tax relief’ on pension contributions. Tax relief reduces your tax bill or increases your pension fund.
When you retire, providing your own pension scheme rules allow, you can usually take up to 25 per cent of your pension fund as a tax-free lump sum. Your regular pension income is then taxed in the same way as the rest of your income.
New pension laws from April 2006 mean you can save as much as you like into any number of pensions – and get tax relief on contributions of up to 100 per cent of your earnings each year, subject to an upper ‘Annual Allowance’. (Savings above a separate ‘Lifetime Allowance’ will be subject to tax charges). Read our related article for detail.
