Do I need to pay tax on my savings?
Have you received a letter from your bank or building society advising they will no longer take tax from your savings and are you confused about what to do? Do you have savings and you are not clear about what the tax implications are?
New tax rules on savings explained
From 6th April 2016, the rules have changed. Prior to this date, tax has been taken before you received your interest payments, but after this April, interest payments will be paid gross (i.e. no tax will be taken off). Also a new savings allowance, called the personal savings allowance, is being introduced and the existing 0% starting rate for savings is continuing.
What does this mean to you?
From April, basic rate tax payers will not have to pay tax on the first £1,000 of their savings interest, whilst higher rate taxpayers will have to pay after the first £500.This new personal allowance is in addition to the existing 0% starting rate, available for the first £5,000 of savings to individuals with a total income below £16,000.
To summarise:
- If your non-savings income and interest is below £16,000, you will continue to be a non-tax payer on your savings interest (but you will pay tax on your non savings income over your personal allowance of £11,000)
- If your non-savings income is between £16,000 and £43,000, you will be a basic rate tax payer, but:
- if your interest is below £1,000, you will no longer need to pay tax on it, nor do you need to tell HM Revenue and Customs (HMRC) about it
- if your interest is above £1,000 you will need to inform HMRC, so that the taxable part of your interest can be taxed.
For example:
- If your non-savings income is £14,000 and your savings interest is £1250, you would be entitled to the 0% starting rate, because your total taxable income is £15,250. You don’t need to do anything as tax isn’t taken at source.
- If your non-savings income is £15,700 and savings interest £1,250, your total taxable income becomes £16,950 and is over the ceiling limit for the 0% starting rate, yet you still have nothing to worry about because the remaining £950 is covered by your personal savings allowance.
- But, if your non-savings income is higher, say £16,200, this would bring your total taxable income to £17,450 and you would be required to inform HMRC about the £250 of interest not covered by your personal savings allowance.
It is now your responsibility to contact HMRC to ensure your PAYE (pay as you earn) tax code includes a restriction for your taxable savings interest and to make sure you pay the correct amount of tax. You may even find yourself in self-assessment if the tax can’t be collected via a tax code.
It is always important to check your tax code to ensure that savings interest has been included correctly and all allowances you are entitled to have been applied.
Note: If you make a ‘gift aid’ declaration you may need to recalculate to ensure you don’t gift aid more than the tax you actually pay.
If you believe you may have been paying tax unnecessarily in previous years, you can claim a refund back as far as the 2012/13 tax year. To do this obtain form R40 from HMRC website, or call them on 0300 200 3300.
Tax Help for Older People http://www.taxvol.org.uk is a registered charity no 1102276, offering free tax advice to older people on incomes below £20,000 a year.
