When you receive interest on your savings, it is normally paid to you net of tax at the basic rate (20 per cent). So, if you’re on a low income you may be able to claim this tax back. Conversely, if you’re a higher/additional rate taxpayer then you may have to pay some additional tax.
Our guide looks at how your savings are taxed.
How your savings income is taxed
The income you receive from your savings is added to your other income. You then pay tax after your tax-free allowances – for example Personal Allowance – have been taken into account. This works as follows (for the 2011/12 tax year):
- Taxable savings income that falls within the £2,560 starting rate for savings Income Tax band is taxed at 10 per cent (but only if the rate band has not been used up by other income as savings income is taxed last)
- Taxable savings income (included with your other income) between the £2,560 starting rate for savings Income Tax band and the upper £35,000 basic rate band is taxed at 20 per cent
- Taxable savings income (included with any other income) between the £35,000 higher rate Income Tax band and the £150,000 additional rate band, is taxed at 40 per cent
- Taxable savings income (included with any other income) over the £150,000 Income Tax band, is taxed at 50 per cent
Generally, your savings interest will be paid after 20 per cent tax has been deducted. This shows on your statement or in your passbook as ‘net interest’.
If the entry says ‘gross interest’ then no tax has been taken off.
Reclaiming tax if you’re a non-taxpayer
If your income means you don’t have to pay tax you can register for gross interest. You do this by completing an R85 form (called ‘Getting your interest without tax taken off’). If you’ve already paid tax you will be able to claim it back.
Reclaiming tax if your non savings income is under £2,560
If your non-savings income is less than the starting rate for savings limit (£2,560 in tax year 2011/12) or if savings and investments are your only source of income – your savings income is taxable at a rate of 10 per cent up to the £2,560 limit.
As your interest will have been taxed at 20 per cent you will be able to claim part of the tax back.
Paying tax if you are a basic rate taxpayer
If you pay basic rate tax at 20 per cent, you will have paid the correct amount of tax on your savings income.
Paying additional tax if you’re a higher rate taxpayer
If you pay the higher rate of tax you will have to tell HMRC about your savings income. You normally do this by Self Assessment or by completing a P810 form so HMRC know exactly what savings income you receive.
You will have to pay the additional tax on your savings interest.
Paying additional tax if you’re an additional rate taxpayer
Additional rate taxpayers complete a Self Assessment form. So, you should declare all your savings income on this form in order that HMRC can claim the additional tax due on this interest.