Tax on Savings etc

moneymoneyman

I have always been employed by the same employer and never had to do any sort of tax return, or have any communication with the inland revenue. My employer does it all.

I am considering setting up a small business and have been browsing the revenue website and the self assesment form. This mentions income from savings and dividends being liable to tax..

However nobody has ever asked me about any of these income's before, so why would i now need to pay tax on it ?

This is pretty much therotical as my savings of £2k are in a mortgae offset account accruing no interest, and my portfolio of banking shares is no longer paying any dividends !.

Any advice is appreciated. Cheers

trevormax

Well firstly, bank or building society interest is paid net of basic rate tax so if you get £100 gross interest, the bank will automatically deduct 20% tax and you will get paid net interest of £80.

The only time tax would not be deducted in your case would be if you are not going to earn enough (including the interest) to go over your personal allowance. In that case, you would fill out a form (a P85) telling the bank to pay you gross interest to save you the hassle of getting a refund from HMRC.

If your employment income is less than £8,915, then some of your bank interest can be taxed at the reduced rate of 10%.

The only time HMRC would bother you about bank interest, is if you are a higher rate tax payer. The banks will only take 20% tax from your interest so if you are a higher rate tax payer (40%) then HMRC will need to collect the remaining 20% tax. To do this, HMRC would put a restriction on your tax code meaning you start to pay tax sooner and in doing so, cover the shortfall of tax on the bank interest.

With dividends, you dont actually pay tax unless the gross income from employment and gross interest plus the gross dividends take you into the higher rate band, at which point, you will have to pay 22.5% tax on any dividends that are in the higher rate band.

Again you should note that the amount you receive for dividends is net of 10% tax, however, the 10% tax isn't actually paid by anyone and is a tax credit. This is one of the more confusing things about dividends for some people.

E.g.

Net Dividend paid £9,000 (this is what you would actually receive). HMRC would deem you to have received £10,000 gross dividends (£9,000 net plus £1,000 tax credit), although the £1,000 they have added on doesn't really exist.

Even though the £1,000 doesn't exist, it is still classed as your income and can still take you into the higher rate tax band, something to be aware of if you intend to pay yourself dividends.

Hope this clears things up a little

tyllwyd

moneymoneyman wrote: »

I am considering setting up a small business and have been browsing the revenue website and the self assesment form. This mentions income from savings and dividends being liable to tax..

However nobody has ever asked me about any of these income's before, so why would i now need to pay tax on it ?

Also, when you fill in the self-assessment return, you will declare the income from your savings and dividends and also tell them about any tax that you have already paid. (You've probably never paid any attention, but you can find that information out from statements etc.) So if the bank has already deducted and paid all the tax due, then there won't be any extra to pay.

moneymoneyman

Thanks guys, That makes it a lot clearer, I am not a higher rate tax payer, my salary is (c) £30k ,

Lokolo

trevormax wrote: »

well firstly, bank or building society interest is paid net of basic rate tax so if you get £100 gross interest, the bank will automatically deduct 20% tax and you will get paid net interest of £80.

The only time tax would not be deducted in your case would be if you are not going to earn enough (including the interest) to go over your personal allowance. In that case, you would fill out a form (a p85) telling the bank to pay you gross interest to save you the hassle of getting a refund from hmrc.

r85

trevormax

Lokolo wrote: »

r85

blast, thats what I get for posting at 2 in the morning, it's way past my bed time hehe.

Cheers.