Savings interest normally has tax taken off at 20 per cent before you receive it. If you're a higher rate (40 per cent) or additional rate (45 per cent) taxpayer, you'll owe tax on the difference. If you have a low income you may be able to claim tax back.
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Savings income is added to your other income and taxed after your tax-free allowances - for example Personal Allowance - have been taken into account, as follows:
All of the above figures apply to the 2013-14 tax year.
You pay tax on your interest in the tax year that the interest is paid to you (or credited to your account) even if you've earned part of it in previous tax years.
Savings income normally has 20 per cent tax taken off before you receive it. This is confirmed by the entry 'net interest' on your bank or building society statement.
If the entry shows only 'gross interest' - and no net interest - then no tax has been deducted. You normally have to register to receive interest gross - for more on this see 'If you're a non-taxpayer' in the section below.
If your level of income means that you don't need to pay tax, you can complete a form R85 Getting your interest without tax taken off. If you've already had tax taken off your interest, you will be able to claim it back.
The rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account. So if your non-savings income is less than the starting rate for savings limit (£2,790) - or if savings and investments are your only source of income - your savings income is taxable at the 10 per cent starting rate up to the limit.
However, your interest will have been taxed at 20 per cent so you will be able to claim part of the tax back.
If you're a basic rate (20 per cent) taxpayer you don't need to take any action. No extra tax is due.
If you're a higher rate (40 per cent) taxpayer you must let HM Revenue & Customs (HMRC) know what interest you have received so that they can collect the extra tax due:
If you're an additional rate (45 per cent) taxpayer you'll need to declare your savings on your tax return so that you pay the extra tax due.
Whatever your current Income Tax band, if you don't normally complete a tax return and there is a significant change to your savings or other income, you must contact HMRC right away so that they can work out whether you need to pay extra or less tax. By contacting them early on you can:
If you complete a tax return you'll need to show (for your combined bank/building society savings) the:
There are three separate boxes for this information.
There's also a separate box to complete for any interest you received without tax deducted.
Your bank/building society may send you a 'Certificate of Tax Deducted' or a statement containing this information after the end of each tax year (5 April). If you need one but haven't received one, just ask. You can also often get the figures you need from your passbook or from your statements of account.
If you have a joint account with a husband, wife or civil partner you should declare half of the income as yours. The second half should count towards their income.
Interest from cash ISAs is tax-free. As a result no tax is deducted at source.