Tax returns: paying tax on savings and investmentsWhich? guides you through what you need to pay
17 January 2013
The deadline for returning your self-assessment tax return is approaching fast with little over two weeks to submit the annual return online and this year, HM Revenue and Customs (HMRC) has announced it will be coming down harder on those who do not submit their tax return on time.
A failure to fill out an online form for the most recent tax year by January 31 is likely result in steep fines. This starts with a £100 penalty for being one day late and will move up to £10 daily fines if over three months late. Find out more in our guide to tax deadlines and fines.
It’s therefore important to fill out your tax return correctly and on time. Income tax is paid on earnings, pensions, benefits, savings and investment income, and rental income.
If you already pay tax through Pay as You Earn (PAYE), you probably won't be asked to complete a tax return by HMRC. But if you're self-employed, a higher-rate taxpayer,a buy-to-let landlord or have complex tax affairs, you may be required to complete one.
Here we explain about income tax from savings and investment, but if you think you need expert help with your tax returns, the Which? Money Helpline has a qualified team who can help with your queries. Sign up to Which? for just £1 and speak to one of our experts.
Tax on savings
Your savings income is any money you earn in the form of interest. This could be from a savings account, or from a corporate or government bonds. Certain types of savings products are tax-free. Any interest you in a cash Isa is paid completely free of tax. The same is true for any prizes you win on premium bonds.
And you don't need to start paying any tax until your total income from all sources for the tax year (which runs from April 6 to April 5) exceeds your annual personal allowance. For the 2012/13 tax year, this is normally £8,105 for those aged under 65. For 2011/12 it was £7,475.
Those aged over 65 receive additional age-related allowance, but this is withdrawn if their income goes above a certain rate. Personal allowance is also progressively withdrawn for anyone with income above £100,000. In 2013/14, basic personal allowance rises to £9,440.
Anything you earn over your personal allowance is subject to income tax. So, even if you receive just a few pounds a year on a badly paying savings account, you still need to declare this information on your tax return.
How much tax will I pay on savings income?
Your savings income will be taxed after being added to your other income and after your personal allowance has been taken into account. You will be taxed at the following rates for 2012/13:
- 10% - for income between £0 and £2,710. Very few people fall into this category as their non-savings income takes them above the savings rate threshold.
- 20% - for income earned up to £34,370 (£35,000 in 2011/12)
- 40% - for income earned between £34,370 and £150,000 (£35,000 and £150,000 in 2011/12)
- 50% - for any income earned above £150,000 (in 2011/12 or 2012/13).
Most interest you earn has tax deducted at 20% before you receive any payment. Basic-rate taxpayers then have no more tax to pay, but higher- or additional-rate taxpayers will have to pay a further 20% or 30%. Non-taxpayers can claim a refund for tax that has been deducted from their savings income.
How much tax will I pay on investment income?
You pay tax on any income your receive from investments – these could be shares, unit trusts, open-ended investment companies or investment trusts. Income from investments comes in the form of dividends, which are a distribution of the profits of a company.
The tax will be calculated depending on the type of savings or investment you have and what other income you receive, again over your personal allowance. You will be at the following rates.
- 10% - for income earned up to £34,370 (£35,000 in 2011/12)
- 32.5% - for income earned between £34,370 and £150,000 (£35,000 and £150,000 in 2011/12)
- 42.5% - for any income earned above £150,000 (in 2011/12 or 2012/13).
Income received from dividends however, is paid with 10% already taken off, regardless of whether you want to reinvest it or have the dividend paid in cash or shares.
Similar to the situation for savings income, basic-rate taxpayers normally have no further tax to pay, although this is only the case if their income from all sources remains below the higher rate tax threshold. Higher-rate taxpayers pay a total of 32.5% on dividend income, but after the first 10% tax credit has been taken into account, this becomes 22.5%. For additional-rate taxpayers, a total of 42.5% is reduced to 36.11% after the tax credit is deducted.
If you decide to sell your investments, you may have to pay capital gains tax. Find out more in our expert guide to CGT.
There isn't much choice for those wanting to invest tax-free, but the returns you receive on the money will be completely yours. Cash Isas and stocks and shares Isas are both popular tax-free options (although stocks and shares Isas aren’t entirely tax-free, because dividends on shares the Isa invest into are paid with 10% tax already deducted).
For the 2012/13 tax year, you can save up to £5,640 into a cash Isa and £11,280 into a stocks and shares Isa. For 2013/14 the limits rise to £5,760 and £11,520 respectively.