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Advanced Taxation (UK) · Income tax: property and investment income

Savings and Dividend Income: Rates, Nil Rate Bands and Allowances

Updated 11 October 2026 · Fact-checked

Income tax splits income into non-savings, savings and dividends. You deduct the personal allowance from non-savings income first, then savings, then dividends. Tax non-savings at 20/40/45%, savings at the same rates after any starting rate or savings nil rate band, and dividends at 8.75/33.75/39.35% after the £500 nil rate band.

Understand Savings and Dividend Income: Rates, Nil Rate Bands and Allowances

UK income tax is not one flat calculation. Your income is sorted into three types: non-savings income (employment, trading, property), savings income (bank and building society interest) and dividend income. Each type has its own order of taxation and its own rates.

The order is fixed. Non-savings income is taxed first, then savings income, then dividends. The personal allowance is set against non-savings income first, then savings, then dividends. The tax bands are used up in the same order. This matters because the type of income that sits at the top of your income is the one taxed at the highest rate.

Savings income gets extra help. A starting rate of 0% applies to savings income that falls within the first £5,000 of taxable income. This only helps if non-savings taxable income is below £5,000, because non-savings income uses up that band first. The savings nil rate band (personal savings allowance) is £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer. An additional rate taxpayer gets none. Your rate status depends on where your taxable income falls, not on gross income.

Dividends get a dividend nil rate band of £500 for everyone. Dividends within it are taxed at 0%. Dividends above it are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band.

The personal allowance of £12,570 is reduced by £1 for every £2 of adjusted net income over £100,000. It is nil once adjusted net income reaches £125,140. Nil rate band income still uses up the tax bands, so it can push other income into a higher band.

Key rules to remember

Income tax rates (non-savings and savings)
Basic £1 – £37,700: 20% | Higher £37,701 – £125,140: 40% | Additional over £125,140: 45%
Bands apply to taxable income, after the personal allowance. Savings income uses the same rates.
Dividend rates
Basic 8.75% | Higher 33.75% | Additional 39.35%
Dividend nil rate band of £500 is taxed at 0% but still uses up the band.
Order of taxation
Non-savings → savings → dividends
Applies to deducting the personal allowance and to filling the bands.
Starting rate for savings
0% on savings income within the first £5,000 of taxable income
Reduced £ for £ by taxable non-savings income. Nil if non-savings taxable income is £5,000 or more.
Savings nil rate band
Basic rate taxpayer £1,000 | Higher rate taxpayer £500 | Additional rate taxpayer nil
Status is set by the band in which your total taxable income falls. The tax tables give the £1,000 and £500 amounts, but you must work out which band the taxpayer is in.
Personal allowance
£12,570 less £1 for every £2 of adjusted net income above £100,000
Nil when adjusted net income is £125,140 or more. Between £100,000 and £125,140 there is an effective marginal rate of 60% on income (where that income is taxed at 40%).

How to solve Savings and Dividend Income: Rates, Nil Rate Bands and Allowances questions

Use the same layout every time. Examiners give marks for the order and for showing each band.

  1. 1List income by type: non-savings, savings and dividends. Savings income and dividends are received gross in the exam unless told otherwise.
  2. 2Work out total income and adjusted net income. Reduce the personal allowance if adjusted net income is over £100,000.
  3. 3Deduct the personal allowance against non-savings income first, then savings, then dividends.
  4. 4Find taxable income in each type. Decide whether the person is a basic, higher or additional rate taxpayer to set the savings nil rate band.
  5. 5Tax non-savings income using the bands. Then tax savings: apply the starting rate if available, then the savings nil rate band, then the remaining savings at 20/40/45%, tracking the bands used.
  6. 6Tax dividends: first £500 at 0%, then the balance at 8.75/33.75/39.35% according to the band each slice falls in.
  7. 7Add up the tax. Deduct any tax already paid, such as PAYE, and state the final liability.
  8. 8 Check that the bands total correctly: the basic rate band should not exceed £37,700 across all income types.

Quickest way: Band-filling shortcut

When to use it: Use when time is short and the question has all three income types and an income level that is clearly in the basic or higher rate band.

  1. Compute taxable income by type after the personal allowance. Write the three figures in a row.
  2. Compare non-savings taxable income with £37,700 and with £5,000. This tells you straight away whether the starting rate applies and where savings fall.
  3. Set the savings nil rate band from the total taxable income (£1,000, £500 or nil).
  4. Place savings then dividends on the band line. Mark where £37,700 is crossed and split the slice there.
  5. Apply the rates slice by slice. Do not forget the £500 dividend slice at 0%.

Common mistakes in Savings and Dividend Income: Rates, Nil Rate Bands and Allowances

  • Deducting the personal allowance from dividends or savings first

    Students want to protect the lower-taxed income.

    Fix: Always set the allowance against non-savings income first, then savings, then dividends.

  • Using the savings nil rate band of £1,000 for a higher rate taxpayer

    Students look at gross income instead of the band in which taxable income falls.

    Fix: Check if total taxable income exceeds £37,700. If so, the allowance is £500. The additional rate applies where taxable income exceeds £125,140, and then the allowance is nil.

  • Giving the starting rate when non-savings taxable income is above £5,000

    The £5,000 figure is remembered but not its link to non-savings income.

    Fix: Starting rate band = £5,000 less taxable non-savings income. If this is nil or negative, no starting rate applies.

  • Ignoring nil rate band income when filling the tax bands

    Students think 0% income does not count.

    Fix: Nil rate income still uses up the basic rate band. Include it when deciding where later income falls.

  • Applying normal 20/40/45% rates to dividends

    Rates are confused across income types.

    Fix: Use 8.75%, 33.75% and 39.35% for dividends, and the £500 nil rate first.

  • Forgetting the personal allowance reduction for income over £100,000

    Students stop at the simple £12,570 deduction.

    Fix: Test adjusted net income against £100,000 in every question and reduce by £1 for each £2 above.

Worked examples

Example 1

Priya has employment income of £30,000, bank interest of £1,800 and dividends of £4,000 in 2025/26. All amounts are gross and no tax has been paid. Compute her income tax liability.

Show the solution
  1. Total income = £30,000 + £1,800 + £4,000 = £35,800. This is below £100,000, so the personal allowance is £12,570.
  2. Deduct the allowance from non-savings income: £30,000 – £12,570 = £17,430 taxable non-savings. Savings £1,800 and dividends £4,000 are fully taxable.
  3. Total taxable income = £17,430 + £1,800 + £4,000 = £23,230. This is under £37,700, so she is a basic rate taxpayer.
  4. Non-savings: £17,430 × 20% = £3,486.
  5. Starting rate: £5,000 – £17,430 is negative, so none. Savings nil rate band for a basic rate taxpayer is £1,000. Tax on savings: £1,000 × 0% = £0 and £800 × 20% = £160.
  6. Dividends: £500 × 0% = £0 and £3,500 × 8.75% = £306.25, which is £306 to the nearest £.
  7. Total tax = £3,486 + £160 + £306 = £3,952.

Answer: Income tax liability is £3,952.

Example 2

Tom has trading profits of £2,000 (his only non-savings income), bank interest of £6,500 and dividends of £3,000 in 2025/26. All amounts are gross. Compute his income tax liability.

Show the solution
  1. Total income = £2,000 + £6,500 + £3,000 = £11,500. This is below £12,570, so all of his income is covered by the personal allowance and £1,070 is unused.
  2. Set the allowance against non-savings first: £2,000 used, leaving £10,570. Against savings: £6,500 used, leaving £4,070. Against dividends: £3,000 used, leaving £1,070 unused.
  3. All taxable income is nil, so no tax is due on any income type.
  4. The starting rate and nil rate bands are not needed here because there is no taxable income.

Answer: Tom's income tax liability is £0. The unused £1,070 of personal allowance is wasted.

Exam tips

  • Set out three columns, non-savings, savings and dividends, and keep them in that order in every computation.
  • State why you are using the £1,000, £500 or nil savings nil rate band. Examiners reward the explanation as well as the figure.
  • Check adjusted net income against £100,000 and £125,140 whenever the question mentions a bonus, pension contribution or Gift Aid. These change the personal allowance.
  • Show the starting rate calculation even if the answer is nil. A short line like £5,000 – £17,430 = nil earns the mark.
  • Calculations need only be to the nearest £. Show all workings, as the supplementary instructions say.

Practice questions from Income tax: property and investment income

Savings and Dividend Income: Rates, Nil Rate Bands and Allowances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Savings and Dividend Income: Rates, Nil Rate Bands and Allowances: frequently asked questions

What is the personal savings allowance by tax band?

A basic rate taxpayer has a £1,000 savings nil rate band. A higher rate taxpayer has £500. An additional rate taxpayer has none. The band is based on where total taxable income falls.

How does the savings starting rate work in ATX-UK?

Savings income within the first £5,000 of taxable income is taxed at 0%. Taxable non-savings income uses up this band first. So it only helps where non-savings taxable income is under £5,000.

Do dividends use the personal allowance?

Yes, but only after non-savings and savings income. If allowance remains, it reduces dividends. The first £500 of taxable dividends is then taxed at 0%, and the balance is taxed at 8.75%, 33.75% or 39.35% depending on the band.

What happens to the personal allowance over £100,000?

It is reduced by £1 for every £2 of adjusted net income over £100,000. It is nil once adjusted net income reaches £125,140.