Interest rates for contractors

[minstrel]

Good spot - worth knowing.

I'd always ignored the 10% band as I was always paying NMW, but I'm now only paying salary upto personal allowance, so I need to rejig my figures.

[dude69]

The 10% band is being scrapped soon, but worth using for now.

I am currently completing my tax return.

The order of tax precedence is as follows:

1. salary
2. interest
3. dividends

The income tax rates are:

savings: 10%/20%/40%
income: 10%/20%/40%
dividends: 10%/10%/40%

For the tax year ending in April (not the return I'm doing), the personal allowance is £5,225

The 10% band is £2,150

As long as your salary is less than £7,375 then, some of your interest will fall into the 10% band, but will be have taxed at source at 20%, meaning you get a refund of the interest paid.

If your salary is exactly £5,225, then you can earn gross interest of £2,150 and get a £215 tax refund on it (the highest possible). This is regardless of the amount of your divdiends, because these are taxed LAST.

£2,150 interest in a good account, say 6%, is earned on about £35k of savings.

So where everyone else gets 4.8% net, we get 5.4%. Not bad.