Do you pay tax on your savings?
If you are a basic rate taxpayer, the tax on your savings interest should be deducted at source. However, if you are a higher rate taxpayer, you may have a further tax liability.
Here are five things that you should know about paying tax on your savings.
Four rates of tax might be payable
Any income that you receive from savings interest is added to your other income and taxed after your ‘tax-free allowances’ have been taken into account. In the tax year 2010/11 the rules are:
- taxable savings income that falls within the £2,440 starting rate for savings Income Tax band is taxed at 10 per cent (assuming the rate band has not been used up by other income, as savings income is taxed last)
- taxable savings income that rises above the £2,440 starting rate for savings Income Tax band, but falls within the £37,400 basic rate band, is taxed at 20 per cent
- taxable savings income that rises above the £37,400 Income Tax band, but falls within the £150,000 higher rate band, is taxed at 40 per cent
- taxable savings income that rises above the £150,000 Income Tax band, is taxed at 50 per cent
Basic tax is normally deducted at source
Savings income normally has 20 per cent tax deducted at source. Your savings account statement will normally confirm this with the entry ‘net interest’.
If the entry shows only ‘gross interest’ then no tax has been deducted.
How to ask for your interest to be paid tax free
If you are a non-taxpayer, you can request that your savings interest is paid tax-free. To do this you must complete a form ‘R85 – Getting your interest without tax taken off’. If the tax had always been deducted, you will be able to claim it back.
Paying additional tax on interest if you’re a higher rate taxpayer
If you are a higher rate taxpayer you have to let your Tax Office know what savings interest you have received in order that they can collect the additional tax that is due. You do this by:
- Declaring your savings interest on your tax return if you self-assess
- Paying the tax through PAYE based on the most recent information HMRC has
- Completing a P810 Tax Review (normally issued every three years) and paying the tax through an amended tax code
If you are an additional rate (50 per cent) taxpayer you’ll need to declare your savings on your tax return so that you pay the extra tax due.
Using ISAs to save
Every individual adult in the UK can save up to a certain amount (currently £10,200) tax-free in an Individual Savings Account (ISA).
£5,100 of this can be saved in a traditional bank or building savings (or ‘cash’) ISA whilst an additional £5,100 (or up to the total £10,200) can be invested in a ‘stocks and shares’ ISA.
Interest on savings in a cash ISA are not subject to income tax or capital gains tax.