The 10% £2560 Savings Income band

[FredSykes]

Got two questions someone might be able to help with..

1) What counts as "Savings Income" for the purposes of the £2560 band? Is it just interest paid by banks and building societies or can it include:

Interest from Unit Trust?
Interest from Corporate Bond?
Is there a definition somewhere?

2) Does dividend income use up the £2560 band? Suppose you have earned income exactly equal to your allowances and then unearned Income of:

Dividends: £100 Gross (and a £10 tax credit)
Corporate Bond Interest £100
Building Soc Interest £100 (and a £20 tax credit)

Presumably the Dividends and Bond Interest use up the first £200 of the £2560 band but that still leaves £2360 so all your Building Soc. Interest comes into the 10% band.

Am I on the right lines?

Thanks.

[section 44]

Interest is interest, whether it is paid by a bank, building society, unit trust or corportae bond etc.

Dividends are savings income.

Dividends: £100 Gross (and a £10 tax credit)

This isn't clear. A paid dividend of £100 would be grossed-up to £111, taking into account the 1/9th notional credit. The gross dividend would then be taxed at 10%, 32.5% or 42.5%, as appropriate.

[maths]

For the purpose of the "starting rate for savings" ( ITA 2007 s12) "dividends" do not fall within the definition of "savings income" (ITA 2007 s 18).

This is because dividend income is potentially subject to the dividend ordinary rate of 10% up to the basic rate band limit (ITA 2007 s 13) in any event.

"Interest" which falls within ITA 2007 s 12 is that falling within ITTOIA 2005 Part 4 Chapter 2.

Once taxable non-savings income (eg earned income) equals £2,560 then no part of any savings income qualifies for the 10% rate (ie the basic rate 20% applies thereto).

[FredSykes]

Thanks for that.

The case I'm looking at has total income from all sources smack in the middle of the £2560 band. My own income means I've never had to look at this before. I'll bet many elderly people are paying too much tax due to the complexity of this.

I looked at ITA 2007 s18 briefly and lost the will to live. ITTOIA 2005 Part 4 Chapter 2 looks a little easier to follow.

Once taxable non-savings income (eg earned income) equals £2,560 then no part of any savings income qualifies for the 10% rate (ie the basic rate 20% applies thereto).

So if taxable non-savings income (eg earned income and dividends less allowances) total £1000 then the first £1560 of "savings income" (as defined in ITTOIA 2005 Part 4 Chapter 2) should be taxed at 10%.

Am I right in thinking that most people in that position will have had £1560 taxed at 20% at source so might be due a refund?

[maths]

Not quite correct.

Non-savings income is taxed first; then savings income; then dividend income.

Assume:

Non-savings taxable income (NSI) 1,000.
Savings taxable income (SI) 1560
Dividend income (DI) 2,000 (gross)

NSI taxed at 20%
SI taxed at 10% (starting rate for savings)
DI taxed at 10% (dividend ordinary rate)

The quantum of the DI is irrelevant to the application of the staring rate for savings.

It may well be that some savings income has had tax deducted at source at 20% and thus a 10% tax refund may apply.