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Income is grouped under a number of traditional headings:
Schedule A - Land and Property.
Schedule D - Trade Profession or Vocation and Other Income.
Schedule E - Earned Income.
(Schedule F - Dividends from UK Companies)
Schedule B that covered the taxation of woodlands was abolished in 1988 and Schedule C covered certain income paid through a UK agent and was abolished in 1997.
The scheduler system is of less relevance under the Self-Assessment (SA) system. Before 1997 income was assessed by the Revenue and payment of tax due on certain dates depending on the schedule. As all income tax is now due on the same date (31st January) under SA, the scheduler headings are really only a convenient way of classifying income of certain types.
Taxed Income was only assessed where the taxpayer was liable to higher rates of tax. Technically, Schedule F applies to companies, the dividends received by individuals are classed as taxed savings.
From a computational point of view it is far more helpful to group income as follows:
'Normal Income'
Savings Income (excluding Dividends)
Dividends (non-refundable)
Life Assurance Gains.
Lump Sums from Employment (Redundancy payments)
The term 'normal income' is not a statutory description! In this case the term 'normal' has been used to cover any income not listed separately. It is basically earned income from employments, trade, profession or vocation and income from land and property but this is not a definitive list.
Savings Income is basically interest earned from bank, building society accounts etc and from Government securities etc. Again this is not a definitive list but covers the common types.
Dividends have been separated from savings income because from 1999-2000 onwards they are taxed differently. Up until this time they were grouped with savings income and taxed in the same way. However, certain dividends (stock and foreign income dividends) had non-refundable tax credits. They are separated from the rest of the savings income even though they are taxed at the same rate.
Life assurance gains are given special tax treatment. This is to relieve the effect of a large sum of money 'earned' over a number of years from being taxed at a higher than normal rate in the year in which the income is received. This is called top-slicing relief.
Lump sums are not taxed any differently than 'normal' income but by separating them from the rest of the income, it is possible to ensure that the tax payable on savings income and dividends is at the lower rate, if applicable.
Income is grouped like this so that the tax borne is applied at the appropriate rate. This is acheived by building up the income as laid out above. Deductions, charges and allowances are deducted first from 'normal' income then from savings income and so on (but see the notes on allocation of allowances, below). The taxable income remaining is then spread over the tax bands 10%, 20%, 40% and from 2010-11 onwards 50%.
Savings income is taxed at the basic rate (20%) unless non-savings income is below the limit for the starting rate, in which case savings income (up to the limit) will be taxed at 10%. Dividends that would fall into the basic rate band are taxed at 10%, higher rate diviends are taxed at 32.5% and from 2010-11 onwards there is a new dividend additional rate of 42.5% for incomes above £150,000.
From 1999-2000 onwards the tax credits on all dividends are non-refundable.
Life assurance gains are gains that may accrue over a number of years but are taxed when the income is withdrawn from the policy. This may mean that the person's income is pushed into the higher rate tax band (40%). If it is, top-slicing relief is applied. The relief if basically computed by working out what rate of tax would be applied to one-years-worth of the gain and apply that rate to the whole gain.
For example if a gain of £5,000 accrues over a 5 year period, and the person ends up with £3,000 taxed at 40%, top slicing relief will be given because one-years-worth of the gain (£1,000) would have been taxed at only 23%. In this example the relief would be £510 (£3,000 @ 40% - £3,000 @ 23%).