Savings income paid net of tax

NotesQuiz

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. (£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

NotesQuiz