Published: 14 October 2015
Making tax on savings less scary
The content on this page is now out of date. For the most recent information visit the Personal Savings Allowance article.
Let's admit it – tax is a subject many of us don't like to think about. It can sometimes be confusing, so it's often pushed to the back of our minds. But being in the know is really important, and recent research from HMRC1 has revealed many of us aren't.
We want to help change this, and make savings tax a less scary subject! Asking yourself these key questions can be quite an eye-opener:
Do you know the rate of interest your savings account is paying?
HMRC research1 has revealed that many people don't know the rate their savings account is paying. Savings accounts were frequently described as a place to keep money out of the way to avoid spending it.
It might be time to re-think the way you think about saving. Not only is saving a great habit to get into, but it's also extremely rewarding to watch your savings grow. The more your savings build up, the sooner you'll see this happen. That's why it's important to know what rate your savings account is paying, and always check the terms and conditions of the account you choose to make sure it suits your needs.
Do you know the rate of tax you pay on your savings interest?
Usually any interest on your savings is taxed, unless you are a non-taxpayer or qualify for zero tax savings. How much tax you pay on your savings interest will depend on the amount of income you earn, including pensions, benefits and salary. If you are saving in an ISA, you will not have to pay tax on the interest earned. Please see below for more information on ISAs.
If you are a basic rate taxpayer (20%), you don't need to take any action. You'll be taxed at least 20p for every £1 you earn in savings interest and this will be automatically deducted by your bank or building society.
If you are a higher rate taxpayer (40%), you need to contact HMRC to tell them how much interest you have received so that they can collect the extra tax due directly from you. You'll be taxed at least 40p for every £1 you earn in savings interest.
This tax year (2015/2016) a zero-tax band was introduced for savings. If your annual income is less than £15,600 you may not have to pay tax on your savings interest. You will need to register with your bank or building society to do this.
For more information about Income Tax rates and Personal Allowance, visit Gov.uk.
Budget 2015
In the 2015 Budget, the Government announced a new Personal Savings Allowance that will apply from April 2016. This means that from April 2016 basic rate taxpayers will not have to pay tax on the first £1,000 of interest they earn on their savings. Higher rate taxpayers will have a personal allowance of up to £500.
Could you be saving tax-free?
An Individual Savings Account (ISA) is a tax-free§ account that lets you save up to a set amount without paying tax on the interest earned. For the 2015/2016 tax year you can save up to £15,240. This can be saved in a cash ISA, a Stocks and Shares ISA or a combination of the two. If you decide to save in both the total amount invested must not exceed £15,240. As with all savings accounts, the amount of interest you could earn on your savings will depend on the savings rate for the account you have. You should always check the terms and conditions to make sure the account meets your needs.
Have you heard of R85 or R40?
There are a couple of key forms you may need to know about when it comes to savings tax.
The first is the R85 Form. This is a form you can fill in to get your savings interest without tax taken off. Your bank or building society can provide this form.
The second is the R40 Form. You can fill in this form to reclaim overpaid tax on the interest from savings from HMRC.
For more information on these forms, visit Gov.uk.
Do you know where to find out more about savings tax?
For more information on savings tax, visit Gov.uk.
You can also take a look at our Interest and Tax guide.
1 IFF Research, Awareness and Understanding of Taxation of Savings Interest, HM Revenue and Customs Research Report 370, May 2015.
§ Tax-free means that interest payable is exempt from income tax. Cash ISAs are available to individuals aged 16 and over who are resident in the UK for tax purposes.
This guide is intended as a summary only and does not constitute legal advice given by Leeds Building Society. No reliance should be placed on this guide and you must make your own decisions, we recommend that you seek legal and/or financial advice if you have any questions or queries.
