Savings income is income such as bank and building society interest. From 2016/17 the Savings Allowance (SA) applies to savings income. Income within the SA is taxed at a new 0% rate (the 'savings nil rate'). An individual's SA in a tax year will be £1,000, except where:
they have higher rate income but no additional rate income in the year (in which case their SA is £500)
they have any additional rate income in the year (in which case their SA is nil).
Alongside the introduction of the SA, banks, building societies and NS&I have ceased to deduct tax from account interest they pay to customers.
Taxation of dividends
When a dividend is paid to an individual, it is subject to different tax rates compared to other income. From 6 April 2016 new rates of tax on dividend income apply - 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. The equivalent tax rates on other income are 20%, 40% and 45%.
However a new Dividend Allowance taxes the first £5,000 of dividends received in a tax year at 0%.
Be aware of the amount of your entitlement to the SA and the Dividend Allowance. The Dividend Allowance is particularly valuable if you are an investor. Annual dividends of up to £5,000 are tax free no matter what your marginal rate of tax is.