The tax-free amounts for investment income are very popular areas in all the tax exams including both Tax Advanced Tax.
With regard to saving income (interest received) the nil rate band is dependent on the rate of tax the individual pays.
Basic rate taxpayers who pay tax at 20% have a nil rate band of £1,000 which means they get tax free interest of up to £1,000 each tax year. Interest in excess of £1,000 would be taxed at 20%.
Higher rate taxpayers who pay tax at 40% have a nil rate band of £500 which means they get tax free interest of up to £500 each tax year. Interest in excess of £500 would be taxed at 40%.
Additional rate taxpayers have no nil rate band and must pay tax at 45% on all their interest.
Finally, if an individual has taxable income of less than £5,000, any savings income is completely tax free. This is referred to as a starting rate taxpayer.
With regard to dividend income, the nil rate band of £2,000 is available to everyone.
Basic rate taxpayers who pay tax at 20% have a nil rate band of £2,000 which means they get tax free dividends of up to £2,000 each tax year. Dividends in excess of £2,000 would be taxed at 8.75%.
Higher rate taxpayers who pay tax at 40% have a nil rate band of £2,000 which means they get tax free dividends of up to £2,000 each tax year. Dividends in excess of £2,000 would be taxed at 33.75%.
Additional rate taxpayers who pay tax at 45% have a nil rate band of £2,000 which means they get tax free dividends of up to £2,000 each tax year. Dividends in excess of £2,000 would be taxed at 39.35%.
If you are planning on doing Tax or Advanced Tax in September or December 2023, I recommend you purchase Advanced Tax Condensed which will allow you to learn the technical rules. If you then practice the key questions I recommend, you too will be ready for anything the examiner throws at you.
These books will really make the difference. You can purchase them using the links below:
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