Chapter 3

Investment income

Chapter learning objectives

Upon completion of this Chapter you will be able to:

 identify savings income
 calculate tax on savings income
 compute the tax payable on dividend income
 explain the key features of an individual savings account (ISA)
 identify the circumstances when accrued income provisions apply and calculate
taxable amounts
 explain how a married couple, or a couple in a civil partnership can minimise
their overall tax liabilities
and answer questions relating to these areas.

The underpinning detail for this Chapter in your Integrated Workbook can
be found in Chapter 3 of your Study Text.

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Chapter 3

Overview

INVESTMENT INCOME

BASIS OF TYPES OF
RATES OF TAX
ASSESSMENT INCOME

HUSBAND & WIFE

PLANNING

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 Investment income

Savings income

1.1 Types of savings income

Examples of the main types of savings income are as follows:

 bank and building society interest

 interest from National Savings and Investments (NS&I accounts)

 interest from gilt-edged securities e.g. treasury stock, exchequer stock

 interest from quoted company loan stock.

N.B. Interest from ISAs and from NS&I certificates is exempt from income tax.

An individual is taxed on the interest received in a tax year.

1.2 Rates of tax on savings income

Savings income is taxed after non-savings income at the following

rates:

%
Starting rate band* £1 – £5,000 0
Basic rate band £1 – £34,500 20
Higher rate band £34,501 – £150,000 40
Additional rate band £150,001 + 45
* The starting rate of 0% only applies if savings income falls into the first £5,000 of
taxable income. This £5,000 band may be reduced, or fully eliminated by, non-
savings income since this is taxed before savings income.

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Chapter 3

Example 1
Theo receives the following income in tax year 2018/19:

 Salary = £14,350

 Bank interest = £2,000

 Interest on NS&I Certificates = £360

Compute Theo’s income tax liability for tax year 2018/19.

 
 

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 Investment income

1.3 Savings income nil rate band

Savings income nil rate band (NRB) = 0% rate for basic and higher
rate taxpayers with savings income above the starting rate band. The
savings NRB reduces the remaining basic or higher rate bands.

The savings income NRB = £1,000 for basic rate taxpayers

£500 for higher rate taxpayers.

Example 2
Androulla receives the following income in tax year 2018/19:

 Salary = £23,850

 Bank interest = £2,500

 Lottery winnings = £100

Compute Androulla’s income tax liability for tax year 2018/19.

 
 

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Example 3
Donald receives the following income in tax year 2018/19:

 Property income = £45,850

 Bank interest = £1,750

 Premium bond winnings = £150

Compute Donald’s income tax liability for tax year 2018/19.

   

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 Investment income

Dividend income

2.1 Rates of tax on dividend income

Dividend income is taxed after non-savings income and savings income

at the following rates:
Basic rate band £1 – £34,500 7.5%
Higher rate band £34,501 – £150,000 32.5%
Additional rate band £150,001 + 38.1%
2.2 Dividend nil rate band

Dividend nil rate band (NRB) = 0% rate for all taxpayers on first
£2,000 of dividend income. The dividend NRB reduces the remaining
basic and higher rate bands.

Any remaining dividend income is taxed at the rates shown above.

N.B. When offsetting the PA and other reliefs, remember to deduct them in the
following order:

(1) Non-savings income

(2) Savings income

(3) Dividend income

Using a columnar approach to lay out your income tax computation will ensure that
you deal with this in the right order

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Chapter 3

Example 4
Ronnie receives the following income in tax year 2018/19:

 Property income = £19,500

 Bank interest = £2,000

 Dividends = £9,000

Compute Ronnie’s income tax liability for tax year 2018/19.

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 Investment income

Example 5
Charis receives the following income in tax year 2018/19:

 Salary = £12,850

 Bank interest = £8,000

 Dividends = £39,000

Compute Charis’s income tax liability for tax year 2018/19.

 
   

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Example 6
In the tax year 2018/19 Eduardo received employment income of £220,550
before the deduction of £71,300 of income tax under PAYE. During the tax
year he also received bank interest of £13,600 and dividends of £9,200.

Eduardo also paid interest of £3,000 on a loan to buy shares in his employer’s
company, which qualifies as a UK employee controlled unquoted trading
company.

Calculate Eduardo’s income tax payable/repayable for the tax year

2018/19.
 

 
 

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 Investment income

Reminder of the income tax computation

Income tax computation – 2018/19

Total Non- Savings Dividends
savings
£ £ £ £
Trading profits X X
Employment income X X
Pension income X X
Furnished holiday lettings X X
Interest income X X
Property income X X
Dividends X X
––––– ––––– ––––– –––––
Total income X X X X
Less: Reliefs
Qualifying loan interest (X) (X)1 (X)2 (X)3
––––– ––––– ––––– –––––
Net income X X X X
Less: Personal allowance (PA) (X) (X)1 (X)2 (X)3
––––– ––––– ––––– –––––
Taxable income X X X X
––––– ––––– ––––– –––––
£
Income tax at appropriate rates X
Less: Marriage allowance (Max £238) (X)
–––––
Income tax liability X
Less: Tax deducted under PAYE (X)
–––––
Income tax payable/(repayable) X
  –––––

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Chapter 3

Individual savings accounts

4.1 Annual subscription limit

The maximum an individual can invest in an ISA for the tax year
2018/19 is £20,000.

Spouses and civil partners each have their own limits.

4.2 Types of ISA

There are two key types of ISA

 Cash ISA

 Stocks and shares ISA.

An individual can invest the overall limit of £20,000 in a mix of different types of ISAs.

4.3 Investor conditions

 Aged 16 or over (but 16 and 17 year olds can only invest in cash ISAs).

 Must be UK resident.

4.4 Tax reliefs

 All income (interest and dividends) is exempt from income tax.

 Disposals of investments held within an ISA are exempt from capital gains
tax.

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 Investment income

Accrued income scheme

 
Aim is to stop individuals selling securities just before the interest payment date to
avoid having to pay tax on the accrued income (most securities are exempt from
capital gains tax, but the interest income would be liable to income tax).

 Disposal price is adjusted to take into account accrued income element up to

the date of the disposal.

 Income element is assessed to income tax as savings income.

 Rules only apply if nominal value of securities held by individual >£5,000.

 Rules do not apply to securities which are transferred on death.

Example 7
Serena sells £40,000 8% loan stock cum interest on 30 September 2018 for
proceeds of £64,000. She originally acquired the loan stock on 1 June 2015.
Interest is paid on 31 January and 31 July each year

Calculate the amount assessed on Serena as interest income in tax year

2018/19.

 
   

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Chapter 3

Married couples – planning opportunities

 

Consider the following:

 Use of marriage allowance (MA) election to transfer fixed amount of PA

between the couple.

 Transfer income generating assets to the individual with lowest net income in
order to save tax (transfers of assets between spouses or civil partners are
neutral for capital gains purposes).

 Joint ownership of shares to maximise dividend nil rate bands.

 Joint ownership of deposit accounts to maximise savings income nil rate

bands.

 Making an election to split joint income according to actual ownership if the

spouse with the higher actual ownership is the lower taxpayer.

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 Investment income

Example answers

Example 1
Theo
Total Non- Savings
savings income
income
£ £ £
Salary 14,350 14,350
Bank interest 2,000 2,000
NS&I certificates – exempt 0 0
–––––– –––––– ––––––
Net income 16,350 14,350 2,000
Less: PA (11,850) (11,850) –
–––––– –––––– ––––––
Taxable income 4,500 2,500 2,000
–––––– –––––– ––––––

Income tax: £ £
Non-savings income – basic rate 2,500 × 20% 500
Savings income – starting rate 2,000 × 0% 0
–––––
4,500
––––– –––––
Income tax liability 500
–––––
Notes:

 Non-savings income is taxed first.

 The savings income falls within the first £5,000 of taxable income and is
taxed at 0%.
 

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Example 2
 

Androulla
Total Non- Savings
savings income
income
£ £ £
Salary 23,850 23,850
Bank interest 2,500 2,500
Winnings – exempt 0
–––––– –––––– ––––––
Net income 26,350 23,850 2,500
Less: PA (11,850) (11,850) –
–––––– –––––– ––––––
Taxable income 14,500 12,000 2,500
–––––– –––––– ––––––

Income tax: £ £
Non-savings income – basic rate 12,000 × 20% 2,400
Savings income – nil rate 1,000 × 0% 0
Savings income – basic rate 1,500 × 20% 300
––––––
14,500
–––––– –––––
Income tax liability 2,700
–––––
Notes:

 The SRB is not available as the savings income does not fall within the
first £5,000 of taxable income.

 As taxable income is less than £34,500, a savings income nil rate band
of £1,000 is available so the first £1,000 of savings income is taxed at
0%.

 The remaining savings income of £1,500 falls into the basic rate band
and is taxed at 20%.

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 Investment income

Example 3
 

Donald
Total Non- Savings
savings income
income
£ £ £
Property income 45,850 45,850
Bank interest 1,750 1,750
Premium bond – exempt 0
–––––– –––––– ––––––
Net income 47,600 45,850 1,750
Less: PA (11,850) (11,850) –
–––––– –––––– ––––––
Taxable income 35,750 34,000 1,750
–––––– –––––– ––––––

Income tax: £ £
Non-savings income – basic rate 34,000 × 20% 6,800
Savings income – nil rate 500 × 0% 0
Savings income – higher rate 1,250 × 40% 500
–––––
35,750
––––– –––––
Income tax liability 7,300
–––––
Notes:

 The SRB is not available as the savings income does not fall within the
first £5,000 of taxable income.

 As taxable income is over £34,500 but below £150,000, a savings

income nil rate band of £500 is available, so the first £500 of savings
income is taxed at 0%.

 The remaining savings income of £1,250 falls into the higher rate band
and is taxed at 40%.
 

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Example 4
Ronnie
Total Non- Savings Dividend
income savings income income
income
£ £ £ £
Property income 19,500 19,500
Bank interest 2,000 2,000
Dividends 9,000 9,000
–––––– –––––– ––––– –––––
Net income 30,500 19,500 2,000 9,000
Less: PA (11,850) (11,850) – –
–––––– –––––– ––––– –––––
Taxable income 18,650 7,650 2,000 9,000
–––––– –––––– ––––– –––––

Income tax: £
Non-savings income – basic 7,650 × 20% 1,530
rate
Savings income – nil rate 1,000 × 0% 0
Savings income – basic rate 1,000 × 20% 200
Dividend income – nil rate 2,000 × 0% 0
Dividend income – basic rate 7,000 × 7.5% 525
––––––
18,650
–––––– –––––
Income tax liability 2,255
–––––
Notes:

 The SRB is not available as the savings income does not fall within the
first £5,000 of taxable income.

 The dividend nil rate band of £2,000 is available to all taxpayers.

 The remaining dividend income falls into the basic rate band and is taxed
at 7.5%.
 

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 Investment income

Example 5
Charis
Total Non- Savings Dividend
income savings income income
£ £ £ £
Salary 12,850 12,850
Bank interest 8,000 8,000
Dividends 39,000 39,000
–––––– –––––– ––––– ––––––
Net income 59,850 12,850 8,000 39,000
Less: PA (11,850) (11,850) – –
–––––– –––––– ––––– ––––––
Taxable income 48,000 1,000 8,000 39,000
–––––– –––––– ––––– ––––––

Income tax: £ £
Non-savings – basic rate 1,000 × 20% 200
Savings income – starting rate 4,000 × 0% 0
––––––
5,000
Savings income – nil rate 500 × 0% 0
Savings income – basic rate 3,500 × 20% 700
Dividend income – nil rate 2,000 × 0% 0
Dividend income – basic rate 23,500 × 7.5% 1,762
––––––
34,500
Dividend income – higher rate 13,500 × 32.5% 4,387
––––––
48,000
–––––– –––––
Income tax liability 7,049
–––––
 

   

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Example 6
Eduardo       
Total Non- Savings Dividend
savings income income
£ £ £ £
Employment income 220,550 220,550
Bank interest 13,600 13,600
Dividends 9,200 9,200
––––––– ––––––– –––––– –––––––
Total income 243,350 220,550 13,600 9,200
Less: Qualifying interest (3,000) (3,000)
––––––– ––––––– –––––– –––––––
Net income 240,350 217,550 13,600 9,200
Less: PA (0) (0)
––––––– ––––––– –––––– –––––––
Taxable income 240,350 217,550 13,600 9,200
––––––– ––––––– –––––– –––––––
Income Tax
£ £
Non-savings income – basic rate 34,500 × 20% 6,900
Non-savings income – higher rate 115,500 × 40% 46,200
–––––––
150,000
Non-savings income – additional rate 67,550 × 45% 30,397
–––––––
217,550
Savings income – additional rate 13,600 × 45% 6,120
Dividend income – nil rate 2,000 × 0% 0
Dividend income – additional rate 7,200 × 38.1% 2,743
–––––––
240,350
––––––– –––––––
Income tax liability 92,360
Less: PAYE (71,300)
–––––––
Income tax payable 21,060
–––––––
 

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 Investment income

Example 7
Serena
Interest income – 2018/19
£
Interest received 31 July 2018 1,600
(£40,000 × 8% × 6/12)
Accrued interest included in the selling price of loan stock
(from 1 August until 30 September 2018)
(£40,000 × 8% × 2/12) 533
–––––––
Total interest assessable to tax 2,133
–––––––

Note – the disposal proceeds are reduced by £533 to take into account the
amount which has been charged to income tax. However, most disposals of
loan stock are exempt for capital gains purposes.

   

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Chapter 3

You should now be able to answer TYU questions 1 – 4, 7 and 11 – 13 from the
Study Text Chapter 3.

Knowledge Check Test: Basic income tax Part 1 on MyKaplan.

For further reading, visit Chapter 3 of the Study Text.

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