Example 22

Hector has no earnings at all, but he does have savings income of £10,000. Hector’s tax-free income limit is £ 6,035 because he is under 65. Hector’s taxable income is £3,965. The calculation below shows how this is worked out.

Total income £10,000
Less personal allowance £ 6,035
Taxable income £ 3,965

The first £2,320 of taxable income is taxed at the special starting rate for savings of 10% and the rest is taxed at 20%. The calculation below shows how this is worked out

£2,320 x 10% = £232
£ 1,645 x 20% = £ 329
Total Tax = £ 561

Hector’s bank will have taken tax off all of his interest at 20% so they will have taken off £2,000 (£10,000 x 20% = £2,000). But Hector is only due to pay £561 tax. This means he can claim a repayment of tax from HM Revenue & Customs of £1,439 (£2,000 - £ 561)