Our experts at DSR Tax Refunds know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.
Do you always pay tax on your savings interest?
No, whether you have to pay tax on this income all depends on how much income you have in total in any given tax year.
You have an allowance for earning tax-free interest, which is made up of your tax-free Personal Allowance, the starting rate for your savings (which depends on your other income) and your Personal Savings Allowance (which also depends on your Income Tax band). This allowance runs in line with the tax year (6th April to 5th April the following year).
If you haven’t used all of your tax-free Personal Allowance (currently set at £12,500) on your wages, pension or other income you have, you can use this to earn tax-free savings interest.
Starting rate for savings
You might also be entitled to earn £5,000 of tax-free savings interest – this is your starting rate for savings. The more you earn in other forms of income, such as your wages or pension, the lower this starting rate will be.
If your other income is £17,500 or more, you won’t be eligible to claim this starting rate of interest. If your other income is less than £17,500 you are entitled to earn £5,000 of tax-free savings interest. This starting rate is reduced by £1 for each £1 of other income above your Personal Allowance that you earn.
So, for example, if you earn £15,000 and get £500 interest from your savings. Your Personal Allowance is £12,500 and is used up by the first £12,500 of your salary – which leaves you with £2,500 of your salary above your Personal Allowance. This reduced your starting rate for savings of £5,000 by that £2,500. This means that you now have a starting rate for savings of £2,500 and as your £500 of savings interest comes within that allowance you won’t have to pay any interest on those savings. However, if your savings interest in the above example was actually £3,000, you would have to pay tax on the £500 which was above your starting savings rate of £2,500.
Personal Savings Allowance
You might also be entitled to a tax-free Personal Savings Allowance. This depends on the Income Tax band you are in. The allowance is worked out as follows:
|Income Tax band||Tax-free Personal Savings Allowance|
This Personal Savings Allowance applies to the following sources of savings interest:
- Bank and building societies
- Credit unions and savings accounts
- Unit trusts, investment trusts and open-ended investment companies
- Peer-to-peer lending
- Government or company bonds
- Life annuity payments
- Certain life insurance contracts
If your savings are already in a tax-free account, such as an ISA or some National Savings and Investment (NS&I) accounts, they don’t count towards this Personal Savings Allowance.
Children’s accounts and foreign savings are subject to different tax rules.
What happens if you go over your allowance?
If you go over your savings interest allowance, you will pay Income Tax and your usual rate of Income Tax. If you are employed or receive a pension, HMRC will change your tax code to collect that additional tax that way. If you already complete a Self Assessment tax return, you need to report the income from your savings interest that way.
What happens if you have already paid tax on those savings?
Sometimes tax is automatically deducted from your savings interest. If you have paid tax on your savings interest which fell within your tax-free allowance, you can claim this overpaid tax back from HMRC. You need to reclaim this overpaid tax within 4 years of the tax year in which you originally overpaid. To reclaim this tax you need to send an R40 form to HMRC and you should receive your overpaid tax back in around 6 weeks.
What do you need to do for previous tax years?
If you are self-employed or have savings interest to declare from tax years before 6th April 2016, you need to complete and return a Self Assessment tax return.
You need to add up all your bank and building society savings and declare the total for all of the interest you received after tax was deducted (this is called net interest). If you don’t know, you can ask your bank or building society to send you a ‘Certificate of Tax Deducted’.
If the account is a joint account with your husband, wife or civil partner, you need to declare half of the income as yours and the other half will count towards your partner’s income.
If you have paid too much tax on your savings interest in previous tax years, you can reclaim this tax using form R40.
How can DSR Tax Refunds help?
We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful. Our team of experts at DSR Tax Refunds are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
This page was last updated on 15/09/2020.