ATXP6 UK
Syllabus A1. Income tax A1e. Property and investment income

A1eii. Savings income paid net of tax

Syllabus A1eii)

Recognise the tax treatment of savings income paid net of tax

Savings income

Although most interest is now paid gross, companies are still required to deduct 20% income tax from interest paid to individuals (unless the interest is in respect of a quoted Eurobond).

Interest paid net will need to be grossed up by 100/80 for inclusion in the income tax computation and there will then be a tax credit equal to the tax deducted.

This credit is deducted from the income tax liability (together with any PAYE) in arriving at income tax payable.

Illustration

A Ltd. pays Bob £16,000 interest.

Bob also has salary income of £60,000. (PAYE £13,200)

What is Bob’s income tax payable?

  • Solution

    Non savings:
    Salary £60,000
    Less P.A. (£11,850)
    
Taxable income £48,150

    Savings:
    Interest Income (£16,000 * 100/80) = £20,000
    Less: (NRB £500)
    Taxable income: £19,500

    Income tax payable:

    Income tax Liability (Salary) (£34,500 20%) + (£13,650 *40%) = £12,360
    
Income tax liability (Interest) £19,500*40% = £7,800

    Less Tax credits:
    PAYE (£13,200)
    TDS (£4,000)
    Income tax payable £2,960