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Ask an expert: “How do I work out tax on savings and dividends?”

Find out how to declare interest and dividends on your tax return

tax on dividends

Every week, Which?’s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q. Please could you help me work out what information I should include on my tax return for savings interest and dividends? Should I deduct the personal savings allowance and dividend allowance from the amount I earned and enter this figure on the return, or should I enter the full amount received? 

Submitted via the Which? Money Helpline.

A. You should enter the full amount you received in interest and dividends during that tax year. HMRC will then take your dividend and savings allowance into account, along with your personal allowance. Any other available allowance will then be deducted as part of HMRC’s calculation of your tax bill.

Savers who exceed their personal savings allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and zero for additional-rate taxpayers) but don’t complete a self-assessment tax return will pay the tax automatically via a change to their tax code. HMRC tells people by letter or email when their tax code has been updated.

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What counts as savings income?

Any interest you get from a savings account will count towards your personal allowance, unless it is in a cash Isa. You’ll also need to include interest paid on investment bonds, or income from funds that invest in bonds.

When to declare savings income

You need to declare the income at the point it becomes available to you. With most savings accounts, this is straightforward enough – you receive the income when it is paid to you.

The exception is where you have a savings bond that only pays the interest when the account matures. If, for example, you had a three-year savings bond that rolled up the interest in the account, and paid all your money back at the end of the term, then you would declare the income when the account matures.

But if you had a three-year savings bond that paid the interest to another account each year, then the money would be “available” to you when it’s paid into your current account – so you’d need to declare the savings interest you receive each year, rather than declaring it all at the end of the term.

Aside from the personal allowance, you’ll pay the same tax rates as earned income – 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers.

The Which? tax calculator is an easy-to-use jargon-free tool which offers personalised tax tips and even submits your return directly to HMRC for you.

How are dividends taxed?

As with savings interest, you don’t need to pay tax on dividends that you receive from shares that are held in a pension or Isa – but you will need to pay income tax on your pension when you access it in retirement.

So if you hold shares in a general investment account, or hold shares in a private company, say, your own business, you’ll pay dividend tax on this income.

Everyone has a £5,000 allowance in the 2016-17 and 2017-18 tax years – so you won’t need to pay any tax on the first £5,000 income. From April 2018, this allowance will be slashed to just £2,000.

Any income you receive over the dividend allowance will be taxed at lower rates than other incomes. The dividend tax rate for basic-rate taxpayers is 7.5%, while higher-rate taxpayers pay 32.5%, and additional rate taxpayers 38.1%.

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