Tax rates for savings

The tax rates for savings are slightly different from those for other types of income. This is because people on low income may still benefit from a 10% ‘starting rate’ tax on savings income and basic rate taxpayers are taxed at a special rate of 10% on dividend income.

Furthermore, the rate of tax for savings income is reliant on how much other income you may have received in the tax year.  This is because you cannot pick and choose the order in which your income is taxed. Savings income is always considered to be your ‘top slice’ of income and therefore subject to your highest rate of tax.

It is quite difficult to work out if you are eligible for the 10% starting rate for savings, so this is considered in a section of its own. Only people on low income (especially pensioners) are likely to be able to benefit from the 10% starting rate band.

The Tax rates for savings change each year. The rates for the tax year 2012/13 are:

0 – £2,710 (starting rate)                      10% (10% for dividends)

to £34,370 (basic rate)                          20% (10% for dividends)

£34,370 to 150,000 (higher rate)       40% (32.5% for dividends)

Above £150,000 (additional rate)    50% (42.5% for dividends)

(Please note the income bands above apply to your taxable income after deduction of your personal allowances for the year.)