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Interest is separated from other income because it is taxed at a 'savings' rate of tax. Up until 1998-99 dividends were also taxed at the savings rate but from 1999-2000 onwards they are taxed differently.
Most of the income taxed at the savings rate is located in the interest section on the income menu. The following income, entered elsewhere is also taxed at the savings rate:
Taxed savings from a partnership.
Foreign savings (interest)
Savings income from a trust fund, settlement or estate.
Accrued income.
Any other income or profits (types 3, 9, 14, 15, 16 and 22)
TESSA, ISA or LISA interest or bonuses unless the account is closed early.
Interest and terminal bonuses from SAYE schemes.
NSB Premium bonds, interest from certificates, children's bonus bonds and the first £70 from ordinary accounts.
Interest on Ulster Savings Certificates (if live in Northern Ireland and lived there when purchased and repaid)
Most interest is taxed at source. There are some exceptions, most commonly income from most of the National Savings Bank (NSB) accounts. The income from some bank accounts taxed under the old Schedule D Case III and some Government securities purchased through the NSB register. Any interest deducted at source may be refunded if the taxpayer does not earn enough to pay tax.
Interest is taxed at 20% at source and there will be no further liability to tax unless the taxpayer is a higher rate taxpayer. In 1999-2000, the interest may be taxed at the 10% starting rate, where applicable.
To compute the tax on interest, the savings income is treated as the highest part of a person's income with the exceptions of dividends, life assurance gains and lump sums from termination of employment.
