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This publication is available at https://www.gov.uk/government/publications/issue-briefing-starting-tax-rate-for-savings-interest/issue-briefing-starting-tax-rate-for-savings-interest
The government is making changes to how interest from savings is taxed. From April 2015, fewer people will have to pay tax on interest they receive from bank and building society accounts. This is expected to help people on low incomes. This briefing explains who the new 0% ‘starting rate’ will affect and how it will work.
1. What’s happening?
The government announced in Budget 2014 that it is cutting the 10% ‘starting-rate’ of tax for savings income to 0%, to provide further support for those on the lowest incomes. It is also increasing the amount of savings income that the new 0% rate applies to, from £2,880 to £5,000.
The government wants as many eligible people as possible to receive interest without tax being deducted – avoiding the need to reclaim it from HMRC. By introducing the changes on 6 April it allows banks, building societies and HMRC more time to make this happen and for as many savers as possible to become aware of the changes. Until then, the starting rate of tax for savings remains at 10%.
2. What does this mean?
It means that most people with a total income of less than £15,600 will not pay any tax on their savings. If someone’s total income (such as wages, pension, benefits and savings income) is less than their personal allowance, plus £5,000, they will be able to register for tax-free savings with their bank or building society.
Other people can also benefit, and have some of their interest eligible for the 0% starting rate – but only if their income (other than interest or other savings income) is less than £15,600 a year.
To help people work out whether they qualify for the 0% starting rate we have produced detailed guidance and a calculator.
3. How do people know if they can register for tax-free savings?
Someone’s ability to register is based on:
the total amount of taxable income they expect to receive between 6 April 2015 and 5 April 2016
how much of this is savings income, such as interest
their tax-free personal allowances for the tax year 2015 to 2016
We estimate that about a million more individuals will be able to register their accounts for interest to be paid without tax deducted, by completing form R85 to give to their bank or building society.
Others may have some of their savings interest eligible for the 0% starting rate and some taxable at 20%. In these cases, an individual will still have tax deducted, but will be entitled to reclaim some tax from HMRC using form R40 or by Self Assessment.
4. How do the changes look in practice?
4.1 Case study: Derek
From April 2015, Derek will earn £12,000 a year in his part-time job as a gardener. His tax-free personal allowance is £10,600, so he is taxed at 20% (the basic rate of income tax), on £1,400 of his wages. He then earns £50 a year in savings income (interest earned on his savings). When you add up Derek’s earnings and his savings income it is less than £15,600, so Derek is eligible to register for tax-free savings.
4.2 Case study: Claire
From April 2015, Claire will earn £25,000 in her job as a chef. Her tax-free personal allowance is £10,600, so she is taxed at 20% on £14,400 of her wages. Claire also earns £80 a year in savings income (interest earned on her savings). However as Claire earns more than £15,600, her savings income is also taxed at 20%.
4.3 Case study: Sharon
From April 2015, Sharon will receive £15,300 per year from her pension. Her tax-free personal allowance is £10,600, so she is taxed at 20% on £4,700. Sharon also earns £500 a year in savings income (interest on her savings), so her total income is £15,800. Because Sharon’s total income is more than £15,600 (her personal allowance plus £5,000), she is not eligible to register for tax-free savings. However, because her non-savings income is less than £15,600 she will be able to claim back some of the tax on her savings income. She can do this by filling out an R40 form and sending it to HMRC, or through Self Assessment.