You may be liable to pay tax on savings interest. Since it is a source of income, you may need to pay tax on the interest you earn from your savings. However, there are a number of tax-free allowances you can take advantage of.
Tax on Savings Interest
Most workers in the UK can earn a certain amount of interest from their savings without paying any tax on their savings interest. The allowances for how much interest you can earn before you have to start paying tax on savings interest include your Personal Allowance, starting rate for savings and Personal Savings Allowance. The limit of allowance granted to you before paying tax resets annually on April 6 because the tax year runs between 6 April to 5 April the following year. How much of an allowance you get depends on your other income. You may need to declare and pay tax if you have interest earned on non-ISA savings accounts and current accounts, income from corporate bonds and government bonds, interest distributions from authorised unit trusts, open-ended investment companies and investment trusts.
Personal Allowance
You may earn up to £1,000 of interest without paying tax, depending on which income tax band applies to you. This is known as your Personal Allowance. You can use your Personal Allowance to earn tax-free interest on savings, where it has not already been applied to your wages, pension or other income.
Where you can Apply Your Personal Allowance
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
- trust funds
- payment protection insurance (PPI)
- government or company bonds
- life annuity payments
- some life insurance contracts
Savings in tax-free accounts like an Individual Savings Accounts (ISA) and some types of National Savings and Investments accounts are not subject to your Personal Allowance. Foreign savings and children’s accounts are subject to different rules.
Starting Rate for Savings
You may also earn up to £5,000 of interest without the need to pay tax on it. This is your starting rate for savings. The more you earn from other income, e.g. your wages or pension, the less your starting rate for savings will be. Your starting rate for savings can be a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1. You are not eligible for the starting rate for savings if your other income is £17,570 or more.
Interest on a Joint Account
Any interest earned will be split equally between the account holders if you have a joint account.
Declaring and Paying Tax
It’s your responsibility to report and pay tax on any interest earned over and above your allowances. If you complete a self-assessment tax return, make sure you include all forms of income when calculating any tax owed. That consists of any savings interest you’ve earned.
Banks and other financial providers are not always required to deduct tax from any interest you earn. What they will do, though, is report any interest earned to HM Revenue & Customs (HMRC) at the end of each tax year. HMRC might use this information to change your tax code to collect any tax due throughout the year. They may adjust your tax code even if you complete a self-assessment return.
What Happens if I go over My Personal Allowance?
You pay tax on any interest over your Personal Allowance at your usual Income Tax rate- which depends on the tax band that applies to you. If you are an employee or receive a pension, HMRC will adjust your tax code to take the tax you owe automatically from your regular payments. HMRC will estimate how much interest you will get in the current year to decide your tax code by looking at how much you got the previous year. If you complete a self-assessment tax return, you need to report any interest earned on savings.
If you are not an employee, do not receive a pension, and do not complete a Self-assessment, your bank or building society will inform HMRC of how much interest you received at the end of the year. HMRC will contact you if you need to pay tax and how to pay it.
If Tax on Saving Income has Already Been Paid
You can reclaim tax paid on your savings interest if the amount falls below your allowance. You can reclaim your tax within 4 years of the end of the relevant tax year. You can claim through your Self-Assessment Tax Return if you complete one. Otherwise, you can fill out Form R40 and send it to HMRC. It usually takes 6 weeks to get the tax back.
Prestige Business Management Works for You
Prestige Business Management can help you streamline your tax and ensure that your financial products are working hard for you, so you can save money and focus on your earnings. Find out what we can do for you. Call us today on 0203 773 2927.
