Tax Credits: Investment income
There is no capital limit for tax credits; the value of any savings/capital is ignored. However, any taxable income from savings and investments is taken into account as investment income.
Investment income is the gross amount of:
- any interest, annuities and other annual payments arising both in the UK and overseas, but excluding property income;
- discounts on securities;
- UK or Northern Ireland public revenue dividends;
- dividends and other distributions of a UK-resident company, plus any associated tax credit (note: from April 2016, dividend tax credit was abolished);
- chargeable event gains (i.e. payouts from certain life insurance policies or bonds) which are treated as part of an individual’s income under ITTOIA, Part 4, Chapter 9, but disregarding top-slicing relief under section 535 of that Act. (Top-slicing relief is a way of compensating a policy holder if receipt of a payout pushes them into a higher rate tax bracket – the rate of tax is determined by spreading the payout over the number of complete years the policy holder has held the policy, and adding the average annual gain to the policy holder’s other income.)
(From 6 April 2016, a nil rate of tax has applied to the first £5,000 of dividend income and this reduces to the first £2,000 of dividend income from 6 April 2018. Similarly, a nil rate of tax applies to the first £1,000 of savings income from 6 April 2016. However, as it is still taxable income, it is taken into account for tax credits.)
The following are disregarded:
- income from savings certificates and interest on tax reserve certificates which are tax-exempt under ITTOIA 2005, section s 692, 693 or 750;
- £70 per tax year of interest on ordinary accounts with National Savings & Investments, which is tax-exempt under ITTOIA 2005, section 691 – but note that provision was repealed with effect from 19 July 2011;
- annual payments made by an individual for non-commercial reasons, which do not form part of the income of the recipient under ITTOIA 2005, section 727 (e.g. maintenance or alimony);
- any interest on a payment made under or in connection with the Windrush Compensation Scheme administered by the Home Office for the period beginning on the date on which the payment is made and ending 52 weeks after that date;
- interest and dividends etc under Personal Equity Plans (PEPs) apart from interest on cash deposits in excess of £180 in a tax year;
- interest and dividends etc under Individual Savings Accounts (ISAs) including interest on cash deposits on which the account manager is liable to tax under the Individual Savings Account Regulations 1998 (SI 1998/1870), reg 23;
- interest payable under a certified Save As You Earn (SAYE) arrangement under ITTOIA 2005, Part 6, Chapter 4;
- betting or lottery winnings;
- interest on the £10,000 compensation payment made people who were held prisoner by the Japanese during World War II, or their spouse, if the payment is held in a distinct account and no payment other than interest has been added to that account;
- interest on compensation payments to victims of National Socialism if the payment is held in a distinct account and no payment other than interest has been added to that account. [A victim of National Socialism is a person who was required to work as a slave or forced labourer by National Socialists or their sympathisers for during World War II, or suffered property loss or injury, or whose child died, at the hands of National Socialists or their sympathisers;
- compensation in respect of an unclaimed account held by a Holocaust victim exempted from income tax by ITTOIA 2005, section 756A;
- any interest or payment which is disregarded for income tax purposes under ITTOIA 2005, sections 751 and 731 (damages for personal injury and periodical payments under structured settlements);
- an annuity paid under a compensation award made under the Criminal Injuries Compensation Scheme (within the meaning of s732(3) of ITTOIA), or under the Victims of Overseas Terrorism Compensation Scheme 2012 or any corresponding scheme established under section 47 of the Crime and Security Act 2010 (to which no liability to income tax arises under section 732 of ITTOIA);
- part of a payment under a life annuity bought with a loan taken out before 9 March 1999 (or certain replacement loans), to a person of 65 or over, and secured on the annuitant’s only or main residence, equal to the amount of interest on the loan which is deductible for income tax under ICTA 1988, section 356 ;
- interest which is compensation to a person under the age of 18 for the death of one or both of his parents;
- that part of a payment made under a purchased life annuity which is exempt from tax under ITTOIA 2005, sections 717 and 719;
- annual payments under immediate needs annuities exempt from tax under ITTOIA 2005, section 725, and policies insuring against health and employment risks under ITTOIA 2005, section 735 (for example Permanent health insurance policies and employment protection policies);
- any payment of a government bonus under section 1 of the Savings (Government Contributions) Act 2017.
Certain payments made from government trust funds or from the Eileen Trust, the 1992 Fund, the Macfarlane Trust or the Independent Living Funds to persons diagnosed with variant Creuzfeldt-Jakob disease or haemophilia, or to their partners, are disregarded. Payments made to the parents of a diagnosed person after their death are also disregarded for a period of two years from the date of first payment. Payments out of the estate of a diagnosed person, up to the amount of trust payments that person had received, are disregarded if paid to their partner, or disregarded for two years if paid to a parent.
Last reviewed/updated 3 November 2023