Tax on savings and investments Taxed savings and investments
Don't expect tax to be automatically deducted
Unless your investments or savings are tax-free or the income you receive each year falls within your annual personal allowance, you will have to pay tax on any interest or income you receive.
With the many savings and investments, same tax will be deducted before you receive the interest or income. However, higher-rate taxpayers may have to pay a bit more.
Quick summary: taxed savings and investments
The table below will help you to clarify whether the income you receive from your savings or investments will already have had some tax taken off.
Unless your investments or savings are tax-free, you will have to pay tax on any interest or income you receive. However, with the following investments, tax is deducted before you receive the income.
| Taxed | |
|---|---|
| Type of income | Notes |
| Accounts (held in £ or foreign currency) at a UK branch of a bank or building society | Non-taxpayers can receive this gross |
| Annuities (but not pension annuities) | n/a |
| British government stocks (other) | No capital gains tax to pay: taxpayers can apply to receive gross or maybe receiving grossnd can ask to have it net |
| Interest on distributions under a will | n/a |
| Loans to foreign governments | In foreign currency, may be received either net or gross but taxable |
| Local authority loans | Non-taxpayers can receive this gross |
| National Savings guaranteed income growth bonds | n/a |
| Non-qualifying UK life insurance policy surrender gains | Insurance company has paid tax on underlying investment. Further tax payable if higher-rate tax payer, if not, no further tax |
| Open-ended investment company distributions (Oeics) | Profits on sale taxed as capital gains Dividends have 10% tax deducted |
| Share dividends from UK companies | Profits on sale taxed as capital gains Dividends have 10% tax deducted |
| Trusts and settlements: income payments to beneficiaries | n/a |
| Unit trust distributions | Profits on sale taxed as capital gains Dividends have 10% tax deducted |
Savings income
Interest on taxed savings such as bank or building society savings accounts is paid after tax of 20% has been deducted by the provider, which pays it direct to HM Revenue & Customs (HMRC).
Basic-rate taxpayers have no more tax to pay, but higher-rate taxpayers have to pay a further 20% using a tax return.
If you don’t normally complete a tax return and you have savings that might attract higher-rate tax, it’s your responsibility to contact your tax office about this (no later than 5 October following the end of the tax year).
Claiming it back
If you are a non-taxpayer (if your total income from all sources comes to less than your personal allowance), then you can claim all of the tax back by completing form R40 available from HMRC.
Better still, non-taxpayers can register to have bank and building society interest paid gross (without tax deducted) by completing form R85, available from HMRC or your bank or building society.
Rules for children
Most children are non-taxpayers, so parents or guardians of children who have saving accounts should complete form R85 to save them paying tax.
See our guide to tax and your children to find out how money given by parents to children may be subject to different tax rules.
Starting-rate band stays for savings income
From April 2008, the basic rate of income tax was reduced from 22% to 20%, but the starting rate band which applied tax at 10% up to a certain limit was removed for income from employment, property and pensions. So now all income from these sources is taxed at either 20%, 40% or 50%.
However, the starting-rate band remained in place for savings income, but will only be paid at this lower rate if some of your savings income, when added to all your other income, falls into the starting rate tax band (up to £2,440 for 2010-2011).
This means you have to have little or no taxable non-savings income to qualify for the lower rate.
We’ve given some examples of how this might work in our guide to tax rates, allowances and amounts.
Dividend income
Income from dividends is paid with 10% tax already deducted, regardless of whether you choose to reinvest it or have the dividend paid in cash (or shares).
Basic-rate taxpayers have no further tax to pay. Non-taxpayers also have this tax deducted and can’t claim it back. Higher-rate taxpayers pay a further 22.5% of the gross dividend, usually by completing a tax return. Additional rate taxpayers pay an extra 36.11%.
If you don’t normally complete a tax return and and are a higher-rate taxpayer who receives dividends, you need to let your tax office know.
For more on savings and investments, also see our book Save and Invest.