How to Apply the 0% Savings Rate

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March 21, 2017

How to Apply the 0% Savings Rate

Posted by Catriona Standingford on March 21, 2017 in AF1, AF5, CF1, R03, R06, Taxation

We all know that the 0% savings rate exists, but how many of us know how it works? It will apply to very few clients, but if you want the best chance of getting through the exams that cover taxation in their syllabus, you’ll need to know how to apply it. Those who are revising for any of the CII AF1, AF5, CF1, R03 or R06 exams will find this to be useful reading.

This article is relevant to examinable tax year 2016/17.

This is what R03 says:

In addition to the PSA, a starting rate of 0% applies to the first £5,000 of savings income for 2016/17. However, unlike the PSA, the starting rate is only available where savings income falls within the first £5,000 of taxable income. Income tax is charged first on non-savings taxable income, then on savings income and lastly on dividend income. Therefore if non-savings taxable income (salary/pension) exceeds £5,000 the starting rate of 0% for savings will not apply.

Here's an example of how to apply the 0% savings rate - useful for #CII revision. Click To Tweet

Let’s use that information and apply it to an R03 question:

After deducting the personal allowance, an individual has taxable income of £2,000 pension income and £5,000 savings income in the 2016/2017 tax year. How much Income Tax is due on the savings income only?

Taxable income means that the personal allowance has been deducted. £2,000 of non-savings income (pension) means that only £3,000 of the 0% threshold of £5,000 is available to be used against the savings income. The PSA of £1,000 can also be used leaving just £1,000 (£5,000 – £3,000 – £1,000) to be taxed at the savings rate of 20%.

£1,000 at 20% = £200 (an effective rate of just 4%!)

With R03 questions, it’s relatively easy to pick out the actual point they’re testing; not so for the written exams where there is so much information in the question it can be easier to miss.

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re wanting to give yourself the best opportunity to pass, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R03 calculation workbook taster now!