Tax help
Paying tax is a way of life: we are taxed on our earnings, investment and savings and even our assets when we die.
Tax is complex, but the more you know, the easier it is to manage your money and reduce your tax bill. Below you'll discover what taxes affect which aspects of your finances from tax-free savings and investments to pension plans with tax-saving benefits and what your allowances are.
Tax on your savings
Any interest you make on your savings is normally taxed at 20%. Higher earners can pay up to 40% or 50%.
In fact, tax on savings income works in a similar way to salaries. The more you earn, the more you pay, and the more you earn on your savings, the more you pay too.
Your savings income is added to any other income you get, any personal allowance you are entitled to is deducted and you're taxed on the remainder on a rising scale. As mentioned above your personal allowance depends on factors such as your age and income levels.
For example if you are below age 65 and your total taxable income is below £34,370, it's taxed at 20%. Any taxable income between £34,371 and £150,000 is liable to 40% tax. This rises to 50% on any taxable income over £150,000.
So, the more you earn on your savings, the more you owe to HM Revenue and Customs (HMRC). The good news is that there's a wide range of savings options to offset your tax liability, including ISAs and pensions.
Tax on your investments
HMRC gets a cut of what you get from 'UK dividends' investment income from UK company shares, unit trusts or open-ended investment companies.
And you face a rising scale of payments: the more successful your investments, the more tax you pay.
Dividend income up to the £35,000 basic-rate tax limit is taxed at 10%. Anything you make up to £150,000 is taxed at 32.5%. If your return is higher than £150,000, you pay 42.5% tax on it. You could also be liable for Capital Gains Tax when you sell your shares.
Non-taxpayers can't reclaim the 10% dividend tax credit.
Offshore bonds and Venture Capital Trusts also offer attractive tax incentives.
Inheritance tax
What you leave behind for loved ones, your 'estate', is liable to Inheritance Tax (IHT) if it's worth more than £325,000.
Tax is paid on the amount over the £325,000 IHT threshold called the nil-rate band (NRB) and at a rate of 40%.
Your estate will typically include your home, personal possessions, what's in your bank account, investments and your car.
Luckily, you get a number of breaks to ease the pain:
- For a start, your estate is exempt from IHT when you leave it to your spouse or civil partner even if it's over the IHT threshold.
- Couples (married or civil partners) can combine their non-taxable NRB allowances, raising their IHT threshold to £650,000. This becomes effective only when the second person dies.
- You can use a trust for transferring your wealth to family members – these provide flexibility, control and tax-efficiency.
- You can also reduce your IHT liability by being generous to your family and friends. Assets ‘gifted’ to your family during your lifetime are exempt from IHT (if gifted more than seven years before you die).
- If your son or daughter is getting married, hand over £5,000 to help them in their new life and it's tax-free.
- In addition, you can give away up to £3,000 every year. Or make smaller gifts of £250 to as many people as you like. Again, all tax-free.
Important legal and regulator information
References to legislation and taxation are based on Standard Life's understanding of law and HM Revenue and Customs Practice. Legislation and taxation are liable to change in the future.
The value of investments, and any income from them, can fall as well as rise and you could get back less than you invest. All figures relate to the 2011-2012 tax year, unless otherwise stated.
