Bank and building society interest - Example 11

Henry took early retirement due to poor health and his wife, Deborah, gave up her job to look after him. Henry receives a pension of £15,000 a year from his former employer. Deborah has no income except the interest on their savings account.

They have a joint bank account, which pays gross interest of about £1,000 twice a year, once in April and once in October. Because Deborah's income is less than her allowance she has completed a form R85 so her share of the interest is paid without tax taken off. So the interest paid in April looks like this.

Interest paid

	Gross interest	Tax deducted	Interest paid
Henry's share	£500	£100	£400
Deborah's share	£500	nil	£500
Total paid into their account			£900

Henry dies in July. All the money in the savings account now belongs to Deborah and a proportion of Henry's pension, £4,000, is also paid to her.

Deborah's tax calculation for the 2007-2008 year looks like this

Deborah's tax calculation for 2007-2008

	Gross	Tax
Pension	£4000	nil
Interest paid in April	£500	nil
Interest paid in October	£1000	nil
Total	£5500	nil
Less personal allowance	£5225

Taxable income 275 x 10% =£27.50 tax due

Deborah's total income is £5,500 and she has a personal allowance of £5225 because she is under 65. Once the personal allowance has been taken off her income Deborah has taxable income of £275. The whole of this amount is taxed at 10% which means she has a tax bill of £27.50.

Deborah's tax position has changed. At the start of the year Deborah expected her total income for that year to be less than her tax allowances which meant she could receive interest without tax taken off. Deborah's circumstances changed when Henry died. Because Deborah now receives some pension and all the interest her total yearly income is now more than her tax allowances.

Deborah must now contact her bank and ask them to cancel the form R85.