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HMRC internal manual

Savings and Investment Manual

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HM Revenue & Customs
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Savings and investment income: savings and dividend income is the highest part of total income

Savings and dividend income is the highest part of total income

Savings and dividend income is taxed as the highest part of a person’s total income, in computing a person’s overall tax liability. ITA07/S16 sets out the following rules.

  • If a person has savings income but no dividend income, the savings income is treated as the highest part of their total income.
  • If a person has dividend income but no savings income, the dividend income is treated as the highest part of their total income.
  • If a person has both savings and dividend income, the amounts taken together are treated as the highest part of their total income, and the dividend income is taken as the highest part of the combined amount.

The priority rules are subject to further rules in ITA07/S1012, which set out the order in which the ‘top slice’ of income is identified in cases where the Tax Acts state that certain income is to be treated as the highest part of a person’s income.

  • Gains on life insurance contracts (ITTOIA05/S461 onwards) and termination payments from employment (ITEPA03/S401 onwards), in that order, are taxed as the very highest slice of income, over savings and dividend income.
  • Savings and dividend income in turn take priority over settlement income, certain transactions in property, and any other income described in the Taxes Acts as the highest part of a person’s income.

Broadly, therefore, the first slice of a person’s income comprises earnings, pensions, taxable social security payments trading profits and income from property. The next slice is savings income, and dividend income is the top slice.

Income taxed at the starting rate for savings

Where an individual’s non-savings income is less than the starting rate for savings limit, the savings income will be taxable at the 10% starting rate for savings up to the limit.

Where an individual’s non-savings income exceeds the starting rate limit for savings, the starting rate limit for savings is not available for the savings income. The individual’s savings income will be taxable at the basic rate up to the basic rate limit, and at higher rate above that.

SAIM1110 gives an example of the application of these rules for 2014-15.

In this example the personal allowance reduces the employment income. ITA07/S25 provides for the deduction of allowances in the way which will result in the greatest reduction in the taxpayer’s liability to tax.

There are changes to the starting rate for savings for 2015-16. Further details can be found at SAIM1112.