Most of us have a savings account –after all, it is a useful way of putting money aside for larger expenses, such as a car, a deposit for a house or even a wedding. But you don’t get to keep everything that you put into a savings account – you’ll get taxed on the interest or income that you earn on the account. To make sure you’re aware of the tax payable and the exceptions to this rule, here are the basics.
First things first, remember that you don’t pay tax on any tax-free savings accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments products, such as savings certificates or Premium Bonds. But you will pay tax on the interest of any savings that you have within a bank or building society savings account.
At the moment, any interest that you earn on such savings account typically has 20% deducted as tax – your account provider does this automatically. But the amount of tax that you pay will vary depending on the income you earn – you may have to pay more, be able to claim some of it back, or get your interest paid tax-free.
Here, we’ll run you through how much tax you’ll pay depending on your circumstances:
Option A: Income less than £15,600 a year
If your income is less than £15,600 a year, you may be able to reclaim tax already applied to your interest. You’ll be able to do this if you didn’t pay tax because your income was below your Personal Allowance, which as standard is £10,600, before 6th April this year. You’ll be able to reclaim tax as well if you qualify for tax-free savings interest.
You can check if you’re eligible for tax-free savings interest by filling in the R85 form, which you can download from the government’s website . If the form says that you’re eligible, contact your bank or building society to tell them and they’ll then register you for tax-free savings.
Option B: Income less than £15,600 a year, excluding savings interest
You may be able to get a refund on some of the tax already deducted from your interest if your total income comes to more than £15,600, but what you earn from savings income is less than this. If you think you’re eligible to claim tax back, you can do so by filling in the R40 form.
No matter which threshold you fall into, remember to get in touch with your bank or building society if your circumstances change during the year. This is particularly important if you begin to earn more than your threshold – as you’ll have to repay it later.
This system is set to change in April 2016. From this point onwards, tax will no longer be charged on the first £1,000 of savings interest received by those paying 20% income tax taxpayers and the first £500 of savings interest received by those who pay 40% in income tax. Up until this point, tax will continue to be deducted according to the current system.