ATXP6 UK
Syllabus A1. Income tax A1a. Property and investment income

A1a. Tax payable on savings and dividend income/Income tax computation/Income tax payable

Syllabus A1a)

Property and investment income

What is included in taxable income?

Computation of Taxable Income

An Income Tax Computation is prepared for each taxpayer and records the income to be taxed for that individual for a tax year. 

The tax year runs from April 6 to following April 5. 

The tax year 2018/19 runs from April 6, 2018 to April 5, 2019.

Therefore each source of income requires its own basis of assessment to determine how much income is to be assessed to tax in each such tax year.

Proforma income tax computation

Non-savings income Savings income Dividends Total
£ £ £ £
Trading Profit X X
Less Trading Loss relief – brought forward (X) (X)
Employment Income X X
Property Income X X
Dividends from UK companies X X
Building society interest X X
Bank deposit interest X X
Other interest X X
TOTAL INCOME X X X X
Less
Qualifying interest (X) (X)
Other Trading Loss reliefs (X) (X)
NET INCOME X X X X
Less: Personal Allowance (X) (X)
TAXABLE INCOME X X X X

Non savings income

This includes income from employment, income from self employment and property income.

Savings income

Savings income is all types of interest income, and for the exam, it is received gross - therefor you just need to include the received amount in the income tax computation. 

Savings income now benefits from a 0% rate, because there is a savings income nil rate band.

For basic rate taxpayers, the savings income nil rate band for the tax year 2018/19 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band

Do not confuse this with the personal allowance, this savings nil rate band is only for savings income, if there is no savings income then it cannot be used against any other types of income.

Also do not confuse this with the savings income starting rate of £5,000 which applies if there is taxable non savings income of less than £5,000

Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the higher rate threshold of £34,500, at the higher rate of 40% if it falls between the higher rate threshold of £34,500 and the additional rate threshold of £150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of
£150,000.

  • Example of a higher rate payer

    For the tax year 2018/19, Jina has a salary of £45,600 and savings income of £1,800.
    Income tax on:  

    Non savings income
    Employment income £45,600
    Personal allowance (£11,850)
    Taxable income £33,750

    £33,750 at 20% = £6,750

    Savings income
    Savings income £1,800

    £500 at 0% = £0
    £250 at 20% (£34,500 - £33,750 - £500) = £50

    £1,050 (£1,800 – £500 - £250) at 40% = £420
     
    Tax liability (6,750 + 0 + 50 + 420) = £7,220

    Note if she was a basic rate taxpayer, then the savings nil rate band would have been
    £1,000 and if she was a additional rate taxpayer, then there would be no nil rate band
    available.

    Also notice that the nil rate band uses up the basic rate band.

Dividend income

This includes dividends received from UK companies. 

The first £2,000 of dividend income for the tax year 2018/19 benefits from a 0% rate.

This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate.

  • Example of dividend nil rate band

    For the tax year 2018/19, Eesha has a salary of £56,000 and dividend income of £6,800.
    Income tax on:  

    Non savings income
    Employment income £56,000
    Personal allowance (£11,850)
    Taxable income £44,150

    34,500 at 20% = £6,900
    9,650 (44,150 – 34,500) at 40% = £3,860

    Dividend income
    Dividend income £6,800
    2,000 at 0% =£Nil
    4,800 (6,800 – 2,000) at 32.5% = £1,560
     
    Tax liability (6,900 + 3,860 + 1,560) = £12,320

Carefully note

These nil rate bands are not deductions, they just allow some savings and dividend income to be taxed at 0%. 

They also use up the bands so, if there is taxable non savings income of £20,000 and taxable savings income of £15,000, even though £500 of the savings income is at 0% it still uses the band and so £35,000 is taxable in total meaning that this taxpayer is higher rate.

Only the personal allowance is a deduction which must be first given to non savings income, then savings income and then dividend income.

This also applies for other reliefs.

Income that is exempt from income tax

  1. Interest or bonuses on National Savings & Investment Certificates

  2. Interest and dividends within an Individual Savings Account [ISA]

  3. Gaming, lottery and premium bond winnings

The difference between an income tax liability and income tax payable

Income tax liability is a taxpayers total tax liability for the year.

Tax payable is the amount of tax that is still owing at the end of the year.

For example, if you are an employee with no other income, you are unlikely to have any tax to pay at the end of the year as it has all been deducted at source by your employer via PAYE.

You would still calculate your tax liability, then deduct any tax paid at source via PAYE to leave you with a tax payable figure.

Therefore,

Income tax liability – tax deducted at source = Income tax payable

Non-savings income is taxed at the following rates:

£1-£34,500 at 20% (basic rate band)

£34,501-£150,000 at 40% (higher rate band)

£150,001 -  onwards at 45% (additional rate band)

Savings income is taxed at the following rates:

£1-£34,500 at 20% (basic rate band) (unless the starting rate is available and then it is 
£0 - £5,000 at 0% and £5,001 to £34,500 at 20%)

£34,501-£150,000 at 40% (higher rate band)

£150,001 -  onwards at 45% (additional rate band)

Remember to use your savings nil rate band!

Dividend income is taxed at the following rates:

£1-£34,500 at 7.5% (basic rate band)

£34,501-£150,000 at 32.5% (higher rate band)

£150,001 -  onwards at 38.1% (additional rate band)

Remember to use your dividend nil rate band!

Illustration

For the tax year 2018/19, Joe has a salary of £40,000, savings income of £2,000 and dividend income of £9,000.

During the year, he paid interest of £300 which was for a qualifying purpose.

Joe’s employer deducted £5,800 in PAYE from his earnings.

What is the income tax payable by Joe for 2018/19?

Solution:

Type of income £
Employment income 40,000
Savings income 2,000
Dividend income 9,000
Total income 51,000
Interest paid (300)
Personal allowance (11,850)
Taxable income 38,850
Income tax:
27,850 (40,000 – 300 – 11,850) x 20% = £5,570

500 at 0% = £0
1,500 (2,000 – 500) x 20% = £300

2,000 at 0% = £0
2,650 x 7.5% = £199
4,350 (9,000 – 2,000 – 2,650) x 32.5% = £1,414
Tax liability (5,570 + 300 + 199 + 1,414) = £7,483
Less PAYE (£5,800)
Income tax payable £1,683

Note

Joe is a higher rate taxpayer, so his savings income nil rate band is £500.

The dividend 0% nil rate band used up some of the basic rate band leaving £2,650 of the basic rate band for some of the dividends with the remainder of the dividends being taxed at the higher rate.