Calculate whether you owe tax on savings income
The way savings are taxed is changing in April 2016 and while it will be much simpler for most of the population, there will be some of us that have to actually do something for the first time. It is important that we all know and understand the new rules to ensure that we remain compliant with Her Majesty’s Revenue and Customs (HMRC).
In addition to the existing 0% savings rate there will be a personal savings allowance – £1,000 for basic rate taxpayers; £500 for higher rate taxpayers. Banks and building societies will no longer take tax at source from our savings income (interest). So, if your savings income is above the limits allowed before paying tax it will be up to you to inform HMRC and to pay the tax due.
So how do you know if you need to contact HMRC?
Asking these simple questions is a good guide, but it is always wise to seek advice if you’re unsure.
2016/2017 figures
Basic rate taxpayer
- Is my taxable income (including my savings income) under £43,000?
- Is my savings income under £1,000?
If your answer is YES to both of these questions you have nothing further to do.
If NO, ask yourself
- Is my total taxable income less than £16,000 (personal allowance £11,000 plus 0% savings rate £5,000?
If your answer is YES you have nothing further to do.
Higher rate taxpayer
- Is my income between £43,001 and £150,000?
- Is my savings income under £500?
If your answer is YES to both of these questions you have nothing further to do.
If NO to any of the questions above, you may owe tax and should seek advice or contact HMRC.
As always, it is never that simple and for those on the boundaries of the rules it can sometimes be difficult to be absolutely sure. Also receiving other allowances like married couple’s allowance, blind person’s allowance or marriage allowance can complicate matters further. It is always wise to seek advice if unsure.
Have a look at Arthur who took all of his savings, £41,633, out of his pension plan and invested them in a fixed rate bond paying 3%. His interest when he receives it (paid without tax being taken off) will be £1,249 and he wonders if he will have to pay any tax?
Assuming his other taxable income is:
- £10,000
- £15,000
- £20,000
- £43,000
And for 2017/18 the personal allowance (PA) is £11,200 and the higher rate band starts at £43,600.
a) Total taxable income will be £10,000 plus £1249 = £11,249.
The total amount is under PA plus £5,000 so 0% savings rate applies on all savings income.
Tax due on savings income – Nil
b) Total taxable income will be £15,000 plus £1,249 = 16,249
He has £1,200 available of the 0% savings rate on his savings (PA, £11,200 plus 0% savings rate band, £5,000 = £16,200, less other taxable income £15,000).
The personal savings allowance will cover the remaining £49
Tax due on savings income – Nil
c) Total taxable income will be £20,000 plus £1,249 = £21,249.
The 0% savings rate is not available because his other taxable income is higher than his PA plus £5,000 available.
Personal savings allowance – first £1,000 no tax due.
Tax is due on the remaining £249 at basic rate 20%, £49.80.
He will need to contact HMRC and arrange for this to be put into his tax code (coded out) or if that is not possible to ask for a tax return.
d) Total taxable income will be £43,000 plus £1,249 = £44,249.
0% savings rate not available, same reason as in c).
Personal savings allowance – Higher rate tax payer so first £500 no tax due.
Tax is due on remaining £749 at higher rate 40%, £299.60.
He will need to contact HMRC and arrange for this to be put into his tax code (coded out) or if that is not possible to ask for a tax return.
This article is by Tax Help for Older People registered charity no 1102276, offering free tax advice to older people on incomes below £20,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.
