Savings
Bank and Building Societies used to pay interest net of standard rate tax (20%). Since 6th April 2016, interest is generally paid gross of tax. From that date, a tax-free personal savings allowance was introduced
- basic rate taxpayers can earn up to £1000 of interest tax-free, per tax year
- higher rate taxpayers can earn up to £500 of interest tax free, per tax year
- Additional rate taxpayers do not qualify for the Personal Savings Allowance
A zero rate applies to the first £5,000 of savings income. It is available only on the element of taxable savings income of up to £5,000 after deduction of the personal allowance. The zero rate can be higher for certain older married couples and others.
Tax Efficient Savings
There are a number of tax-free saving products in the United Kingdom, some of which have a direct equivalent in Ireland and some of which do not.
As in Ireland, National Savings Certificates, Premium Bond prizes and similar government back products are tax exempt within certain limits.
An individual savings account (an ISA) is the very common form of tax-efficient investment. It can be opened by any individual, 16 or over, (16-17 cash ISAs only) who is resident and ordinarily resident in the UK. Income is received free of income tax. Disposals of investments within an ISA are free of Capital Gains Tax. There are certain conditions and limitations.
An ISA can have cash or cash-like equity products. It can also be stock, shares and insurance products. Investments in life assurance policies, unit trusts, and open-ended investment companies qualify. Investments in unlisted companies do not qualify.
There is an annual subscription limit of £20,0000. Husbands and wives each have their own limit. There is a choice of providers and account formats.
Home Purchase
Since 6th April 2017, there is a “Lifetime ISA”. Taxpayers can save up to £4,000 per annum until aged 50 and the government adds 25% to the account, The fund must be used to assist in the purchase of a first home up to £450,000 or withdrawn fax free after age 60. Otherwise, a levy is payable.
The Help to Buy ISA is aimed at persons over 16 years saving for a deposit for their first home. It is limited to one per person. Savings can be £1,200 in month 1 and thereafter up to £200 per month. The government contributes 25% up to a maximum of £3,000 when the home is purchased. The price must be less than £250,000 outside London, £450,000 in London. Minimum savings is £1,600. Savings cannot be in both Lifetime ISA and Help to Buy ISA in the one year.
Seed and Venture Capital
There are other investment incentives to facilitate enterprise. They include the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and Venture Capital Trusts.
Enterprise Investment Scheme
- relief at 30% on investments up to £1,000,000 per year
- can be carried back subject to this cap
- shares must be in qualifying unquoted trading company by outside
- share must be held for 3 years
- losses on disposal qualify for CGT relief.
Seed Enterprise Investment Scheme
- applies to similar qualifying companies as above
- targeted at an earlier stage of development
- relief at 50% on qualifying investment up to £100,000 p/a
- the shares held for three years.
Venture Capital Trusts
- aimed at small business sector investment
- relief at 30% on share subscription up to £200,000 (from total income)
- shares held for 5 years
- tax-free dividends.
Dividends
Dividend income is income received from companies. It is deemed to be received net of a notional tax credit. Therefore the dividend income received must be grossed up by (100 divided by 90). The purpose is to mitigate to some extent the double taxation aspect of receiving dividends from companies, which have already been taxed.
The company does not, in fact, pay any tax to HMRC. There was formerly Advance Corporation Tax and actual deduction system in England and Wales. This was abolished at the start of this decade. However, Ireland introduced a dividend withholding tax which is an actual deduction of standard rate tax, and an actual credit.
Dividend Income
The nil rate is £5,0000. The rates applicable to dividends that would otherwise be taxed at the basic rate it 7.5%, at the higher rate, 32.5% and at the additional rate 38.1%.
