SAIM1110 - Savings and investment income: tax on savings and investment income: example for tax year 2019-20
Example
In the tax year 2019-20 Jane’s total income is £52,500. She has income of £46,000 from employment, savings income in the form of building society interest of £1,500 and dividends of £5,000. The personal allowance for 2019-20 is £12,500 and the threshold after which higher rate tax applies is £50,000. The 0% starting rate for savings band is £5,000. The personal savings allowance applies to savings income, including interest, up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. As Jane’s total income falls into the higher rate band, she is entitled to a £500 personal savings allowance.
Employment income is taxed first followed by savings income and dividend income. The first £500 of her savings income is covered by the personal savings allowance. The starting rate for savings does not apply because non-savings income exceeds the personal allowance plus the starting rate for savings band of £5,000.
The dividends are taxed as the highest part of income. The first £2,000 is covered by the ‘dividend allowance’, more accurately called the dividend nil rate, see SAIM1080 and ITA07/S13A. S13A applies the nil rate to a maximum £2000 instead of the dividend ordinary, upper or additional rates according to the circumstances of the case.
Jane’s tax liability for 2019-20 is therefore as follows:
| Income | £ |
|---|---|
| Employment | 46000 |
| Interest | 1500 |
| Dividends | 5000 |
| Less personal allowance | (12500) |
| Taxable | 40000 |
| Tax | £ |
|---|---|
| Employment income (46,000 - 8,500 PA* (personal allowance)) @ basic rate 20% | 7,500 |
| Interest (1,500 - 1,000 PA*) = 500. This is not taxed after the personal savings allowance of £500 is applied | 0.00 |
| Dividends (5000 - 3,000 PA*) = 2000. This is not taxed after the application of the of the £2,000 dividend allowance | 0.00 |
| Tax payable | 7,500 |
*note that the personal allowance has been allocated to Jane’s different income streams in a way which obtains the most beneficial result for the taxpayer under the beneficial ordering rules at s25(2) ITA 2007.