If your total income exceeds your taxable allowance then you are usually required to pay tax on any interest or income you receive. As a rule, banks and building societies deduct 20% tax from any interest you’ve earned before you receive it, transferring it to HM Revenue & Customs.
A quick look at your monthly statement will reveal a ‘net interest’ entry. If the entry reads ‘gross interest’ then no tax has been taken.
What if you don’t pay tax?
If you earn too little to pay tax, fill out an R85 form and send it to your bank or building society. This will allow you to receive interest without the tax deducted. If tax has already been taken, you can reclaim it.
What if you pay the lowest rate of tax – 10%?
The amount of tax you pay on savings is calculated after any non-savings income has been accounted for. So, if your non-savings income is less than the starting rate for the savings limit, or if your only income comes from savings and investments, your savings income is taxable at 10% up to the limit. You can reclaim some tax back as the interest will have been taxed at 20%.
What if you’re a basic rate taxpayer – 20%?
There’s no need to do anything because you’ll have been charged the basic rate of 20%.
What if you’re a higher rate taxpayer – 40%?
Contact HM Revenue & Customs, advising them on the interest you have received so that they can recoup the extra tax due.
What if you’re an additional rate taxpayer – 50%?
If you’re a 50% taxpayer you must declare your savings on your tax return so that the extra tax owed can be recouped.
What if your circumstances change?
Regardless of your current tax band or whether you normally complete a tax return, if there is a change to your savings or income you must contact HMRC to allow them to recalculate the tax you owe. You will prevent tax accumulating or avoid overpaying if your income has fallen. Make sure you declare any income you receive from offshore savings accounts or other savings where tax is not deducted at source.
How to reclaim tax on your savings
If you feel you’ve been hard done by on the tax front, request an R40 Tax Repayment Form from HMRC for each year you think you overpaid. Providing you claim within four years, you should recoup the tax you’re owed.
Maximise your tax-free ISA allowance
An ISA will give you a better rate than most other savings accounts. With an annual tax-free allowance of £11,280, you could save up to £5,640 in a Cash ISA and put the remainder in a Stocks and Shares ISA. Alternatively, you could channel your full allowance into stocks and shares.
National Savings and Investments
NS&I offer several tax-free products including Cash ISAs, savings certificates (fixed-interest and index-linked) and children’s bonus bonds. Premium bond and lottery winnings are also tax-free.
These replaced Child Trust Funds in 2011. Up to £3,600 can be invested tax-free every year.
Don’t forget the advantages of saving through a pension scheme – you’ll be able to take 25% as a tax-free lump sum when you retire.