Do you pay tax on the interest you receive on your savings?
If so, there may be ways for you to benefit from tax relief on your interest and to build up your savings tax-free. Our guide explains how to claim tax relief on your savings interest.
Tax on savings interest
Building societies, banks and other financial institutions that offer savings accounts are obliged by law to deduct 20 per cent Income Tax from the interest they pay to you, the saver. This tax then goes to HM Revenue & Customs (HMRC).
Most people pay some tax on their savings interest. However there are situations whereby you shouldn’t pay any tax, as well as ways to avoid paying tax in the first place.
When you shouldn’t pay tax on your savings interest
Non taxpayers generally do not pay any tax on savings interest. So, if you are not due to pay any tax, you may be able to claim back from HMRC all the tax deducted from your interest.
Other savers may be able to claim back some of the tax deducted. This is because the amount of tax taken off the interest you earn is more than you are due to pay.
If you think that your taxable income will probably be less than the amount you can have before you start to pay tax, you can register to receive your savings interest in future without tax deducted. This is called ‘registering for gross interest’.
How to claim the tax relief
If you wish to receive your savings interest without the tax being deducted, you should complete a R85 form. You can get this from your bank or building society, or from HMRC directly. Separate R85s are required for different banks and building societies, although you can generally register for gross interest on all your accounts with one institution with one R85 form.
Once the form is completed, it should be provided directly to your bank or building society.
If your circumstances change and you do start having to pay tax, you should let your savings provider know straight away.
If you are a UK taxpayer, you can still claim tax relief on your savings by investing your money into an Individual Savings Account (or ISA). These are special tax-free savings accounts offered by most banks and building societies.
ISAs have upper limits for investment but you can open a new ISA (or add to your existing ISA) every tax year. Any interest you receive from your ISA is tax-free, irrespective of whether you are a taxpayer or not.