Savings income and dividends are taxed at the recipients' highest tax rate.
The relevant legislation in ITA07/S16 sets out the following rules.
- If a person has savings income but no dividend income, the savings income is treated as the highest part of their total income.
- If a person has dividend income but no savings income, the dividend income is treated as the highest part of their total income.
- If a person has both savings and dividend income, the amounts taken together are treated as the highest part of their total income, and the dividend income is taken as the highest part of the combined amount.
This usually means that the first slice of a person’s income comprises earnings, pensions, taxable social security payments trading profits and income from property. The next slice is savings income (if applicable after personal savings allowance), and dividend income (after dividend allowance) is the top slice.