ACCA ATX ^UK Syllabus A1. Income tax - Savings income paid net of tax - Notes ^{2 / 3}

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. (£12,570)

  Taxable income £47,430

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

  Income tax payable:

  Income tax Liability (Salary) (£37,700 20%) + (£9,730 *40%) = £11,432 
  Income tax liability (Interest) £19,500*40% = £7,800

  Less Tax credits:
  PAYE (£13,200)
  TDS (£4,000)
  Income tax payable £2,032