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How to Apply the Savings Rate of Tax

How to Apply the Savings Rate of Tax

The 0% savings rate of income tax can be tested in the CII CF1, R03, R06, AF1, and even AF5 exams.  In this article, we look at how it works. 

This article is relevant to examinable tax year 2019/20.

In 2019/20, a starting rate of 0% applies to the first £5,000 of savings income.  However, this rate only applies 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.  Remember that taxable income means after the personal allowance has been accounted for.

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


Let’s apply this to a question:

Julie has a salary of £12,000 and receives savings interest of £2,000 in this tax year.

Julie’s salary is within her personal allowance, and her savings income is within the £5,000, so she pays no income tax.

Let’s imagine now that Julie has a salary of £15,500 and receives savings interest of £2,000 in this tax year.

£12,500 of her salary is covered by her personal allowance with the £3,000 remaining taxed at 20%. The taxable income of £3,000 reduces the starting rate for savings by £3,000 so £2,000 is the amount charged at 0%.

If this type of question appeared in one of the written papers, candidates should set it out as follows:

 Earned IncomeSavings Income
Personal Allowance£12,500
Taxable Income£3,000 (this reduces the starting rate for savings by £3,000)
£5,000 - £3,000 = £2,000
The interest is therefore not taxable.

If Julie’s savings income had been £3,000 the additional £1,000 would have been covered by her personal savings allowance (PSA).

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!

Click here to download our free calculation workbook taster for CII R03

Alternatively, you can download taster resources for AF1AF5, CF1, or R06 if you’re planning to sit one of those exams.