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Tax Deadline Looming Image of a sharpened pencil with black text which reads Todays Tax TipThe deadline for sending in your self-assessment tax return is now only approaching fast with less than two weeks to submit the return online and if you are late, HMRC has stated that t will be cracking down harder on those who do not submit their tax return on time.

Failure to send in your tax return by January 31 will result in steep fines. This starts with a £100 penalty for being one day late and will move up to £10 daily fines if over three months late. It’s therefore important to fill out your tax return correctly and on time.

If you already pay tax through PAYE, the chances are that you probably won’t be asked to complete a tax return by HMRC. But if you’re self-employed, a higher-rate taxpayer, a buy-to-let landlord or have complex tax affairs, it is near certain that you will be required to complete one.

Today, I will concentrate on tax on savings and investments.

Tax on savings

Savings income is any money you earn in the form of interest. This could be from a Bank or Building Society Account, or from a corporate or government bonds. Some types of savings products are tax-free, for example, any interest you earn in a Cash ISA is paid completely free of tax, as are wins on premium bonds.

You will not have to start paying any tax until your total income from all sources for the tax year to April 5th falls within your annual personal allowance (2012/13 tax year, £8,015 and for 2011/12 it was £7,475).

Those aged over 65 receive additional age-related allowance, but this is withdrawn if their income goes above a certain rate. Personal allowance is also progressively withdrawn for anyone with income above £100,000. Anything you earn over your personal allowance is subject to income tax. So, even if you receive just a few pounds a year on a badly paying savings account, you still need to declare this information on your tax return.

How much tax will I pay on savings?

Your savings income will be taxed after being added to your other income and after your personal allowance has been taken into account. You will be taxed at the following rates for 2012/13:

  • 10% – for income between £0 and £2,710.
  • 20% – for income earned up to  £34,370 (£35,000 in 2011/12) *
  • 40% – for income earned between £34,370 and £150,000 (£35,000 and £150,000 in 2011/12) *
  • 50% – for any income earned above £150,000 (in 2011/12 or 2012/13) *

(* Note, theses figure exclude your personal allowance)

Most interest you earn has tax deducted at 20% before you receive any payment. Basic-rate taxpayers then have no more tax to pay, but higher- or additional-rate taxpayers will have to pay a further 20% or 30%. Non-taxpayers can claim a refund for tax that has been deducted from their savings income.

How much tax will I pay on investments?

You pay tax on any income your receive from investments, usually in the form of dividends.

The tax will be calculated depending on the type of savings or investment you have and what other income you receive,

  • 10% – for income earned up to £34,370 (£35,000 in 2011/12) *
  • 32.5% – for income earned between £34,370 and £150,000 (£35,000 and £150,000 in 2011/12) *
  • 42.5% – for any income earned above £150,000 (in 2011/12 or 2012/13 *

Income received from dividends however, is paid with 10% already taken off, regardless of whether you want to reinvest it or have the dividend paid in cash or shares.

As with savings income, basic-rate taxpayers normally have no further tax to pay, although this is only the case if their income from all sources remains below the higher rate tax threshold. Higher-rate taxpayers pay a total of 32.5% on dividend income, but after the first 10% tax credit has been taken into account, this becomes 22.5%. For additional-rate taxpayers, a total of 42.5% is reduced to 36.11% after the tax credit is deducted.

If you sell your investments, you may have to pay capital gains tax (£10,600 in 2011/12 and 2012/13)

Tax-free options

There isn’t much choice for those wanting to invest tax-free, Cash ISAS and stocks and shares ISAS are both popular tax-free options (although stocks and shares ISAS aren’t entirely tax-free, because dividends on shares the Isa invest into are paid with 10% tax already deducted).

For the 2012/13 tax year, you can save up to £5,640 into a cash ISA and £11,280 into a stocks and shares ISA. For 2013/14 the limits rise to £5,760 and £11,520 respectively

David Jones has been helping small business owners save money on their tax returns since 1986. Read David’s  profile here OR contact him for a free chat about your business finances.