03: Investment income

Your investment income is treated as the top slice of your income, with dividends above your other investment income.

  • Most investment income, other than dividends and rents, is taxed at 20% to the extent that your total income less allowances and reliefs is not more than the basic rate limit (£34,800).
  • Any of your savings income that falls within the first £2,320 of your taxable income is taxed at a rate of 10%. In practice, only those with low earnings/pensions income can benefit from this rate.
  • If your total taxable income is more than £34,800 in 2008/09, you will almost certainly be a higher-rate taxpayer and have to pay 40% tax (or 32.5% in the case of dividends) on that part of your gross investment income that falls above this basic rate limit.

Taxed savings income is passed to you after 20% tax has been deducted at source. Basic rate taxpayers therefore have no more tax to pay, but if you are a higher-rate taxpayer, you are liable for a further 20% of gross savings income above the basic rate limit. Where your taxed savings income falls is taxable at 10% or is covered by allowances, you can reclaim the tax deducted to the extent that it exceeds the tax actually due.

Taxed savings income includes bank and building society interest, annuities, and interest on government stocks if the taxpayer chooses.

Untaxed savings income includes some National Savings and Investments income, interest on government stocks and interest on certain bank deposits of at least £50,000.

Dividends from UK and foreign companies carry a tax credit of 1/9 of the cash dividend, equivalent to a tax deduction at source of 10% of the gross dividend.

  • The tax credit covers the full tax liability of shareholders as long as your total income less allowances and reliefs is not more than £34,800. But the tax credit cannot be repaid to you if you are a non-taxpayer.
  • If you are a higher-rate taxpayer, you are taxed at a total rate of 32.5% on that part of your gross dividend that falls above the basic rate limit. You therefore pay an extra 22.5% on gross dividends - equivalent to 25% of net dividends after deducting the tax credit. For example, if you receive a dividend of £900, the tax credit will be £100 and the higher rate tax will be £225.