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Savings can often unlock the door to financial freedom and reduced finance related stress in both families and households. In this finance guide we look at the impact of saving on household finances.
Savings income is additional income that is a result of your savings. Savings income can be interest received on your bank accounts, building society accounts, or postal accounts. It can also be any UK dividends or income from any foreign investments. Moreover, the best part is that savings income makes more money available to you for your household expenses.
To earn savings income, money could be saved in a savings account, shares which pay a dividend, bonds, or property. Savings income can also be earned by investing in different types of funds which may be investing in equity, corporate bonds, commercial property, and others. Each method has different risks and different returns. You should choose the most-suitable method based on your knowledge, your present financial situation, and your future financial goals.
Most interest received from savings is taxable. Typically around 20% tax is deducted on savings interest. Similarly, income received from UK dividends is taxable. Dividend tax can be anywhere in the range of 10% to 37.5% based on your tax band. Suppose your income is between £31,866-150,000 and you fall in the higher rate tax band of 40%. If you get a dividend of £5,000, you will have to pay tax on this at the rate of 32.5% and thus your net savings income will be £3,375. Savings income from other sources has different tax rates. You need to factor the tax on savings income before planning your annual household finances.
Not all savings require you to pay tax on income. The exceptions are income from certain tax-free accounts such as Individual Savings Accounts (ISA) or certain National Savings and Investment products. For example, if you get any interest or dividend from the ISA, you do not have to pay tax. Other non-taxable methods of savings include junior ISA, child trust fund, and pension contribution.
If you have the money, there will be lots of saving options available to you. However, you should invest only in the method that you are most comfortable and the one you fully understand. Something that has worked for others may not necessarily be the best option for you.
Use our household budget calculator to see how saving income affects your household's finances