The government has announced a new 0% starting tax rate for savers on a lower income, which could be a money-saver for 1,500,000 people in the UK.
The current ‘starting-rate’ of income tax for savings interest is 10% on the first £2,880 of savings income. From next month, the lowest rate will be 0%, and the amount of savings you can have before you have to pay tax has risen to £5,000. The government first talked about this in the Chancellor's Budget last March, but the rule will only come into force at the start of the next tax year on 6th April 2015.
Who can benefit?
If you have a total income of less than £15,600 in the tax year 2015-2016, you may be eligible for tax-free savings. To work out whether you qualify, add up all of your wages, pensions, and benefits that you receive in a year. This must be less than the Personal Allowance of £10,600, and any income earned from savings interest must be below £5,000 for you to benefit from the tax-free savings. If you’re not sure whether you’ll be eligible for tax-free savings interest, HMRC has a helpful calculator on its website to help you work it out. Around a million savers will be eligible to pay no tax on the first £5,000 of their savings income, according to the government’s estimates.
If your yearly income is more than £15,600, but the amount you earn that doesn’t from savings income is less than this, you may be able to reclaim some tax on your savings income. The government estimates that 500,000 savers will be able to benefit from this, so if you’re on a lower wage or salary, there’s a good chance you’ll be able to make a bit of extra money on your savings income.
The changes don’t apply to ISAs, or other tax-free savings accounts, like Premium Bonds, as you already don’t pay any income tax on these.
How do I apply?
To apply for the tax-free savings interest, you’ll have to fill in form R85, which can be downloaded from the government’s website. This will tell your bank, building society, or alternative savings account provider that you don’t need to pay tax on the interest you earn on your savings. If you hold more than one account, you’ll have to fill out a form for each one. If you think you’re eligible to claim, you should fill in form R40 instead.
If you have a change in your circumstances during the year, and this means that you earn more than the threshold, you’ll have to tell your bank or building society that you need to start paying tax on your savings income again – otherwise you’ll have to repay it later.