How are dividends and savings interest actually taxed?

Differently from earnings, and differently from each other — with their own allowances and their own rates, which is why the tax on the same amount of money varies enormously depending on where it came from.

Savings interest. Taxed as income, but with two things sitting in front of it:

The starting rate for savings, a band taxed at 0% available only to people with low earned income — it reduces as other income rises and disappears entirely above a modest level.

The personal savings allowance, giving basic-rate taxpayers a tax-free amount of interest, a smaller amount for higher-rate taxpayers, and nothing at all for additional-rate taxpayers.

Above those, interest is taxed at your normal income tax rate. Banks no longer deduct tax at source, so interest is paid gross and the tax is collected through your tax code or self assessment — which is why people are surprised by a tax code change after a good year for rates.

Dividends. Taxed at their own rates, which are lower than the equivalent income tax rates, after a dividend allowance taxed at 0%. That allowance has been reduced substantially over recent years, bringing many more small shareholders into the charge.

Why dividends are taxed more lightly: the company has already paid corporation tax on the profits. The lower rates are a partial adjustment for that, not a giveaway — though the combined effect still makes dividends attractive relative to salary for company owners, which is why the split between salary and dividends is a perennial planning question.

Where the order matters. Dividend income is treated as the top slice of income, so it is the personal allowance and rate bands remaining after everything else that determine the rate — which is why a modest change in salary can move dividend tax by more than expected.

What removes the problem entirely:

ISAs, where interest, dividends and gains are free of tax and need not be reported at all.

Pensions, with relief on the way in.

Using a spouse's allowances, where assets can be transferred.

General information, not tax advice.