Bank and building society interest - Example 3

Sue is 21 and works part time as a free-lance Italian interpreter, earning £3000 a year.

She also has some savings in the building society that earns about £1500 a year interest, and which is paid on 1 April each year. Sue's total annual income is about £4500, and because it is less than her income tax personal allowance she can receive her interest without tax taken off - Sue completed a form R85 several years ago.

In 2007, because of a merger with another building society, the annual interest is not paid until 7 April. In 2008, and later years, the payment date is once again 1 April.

The year the interest was paid on 7 April will change Sue's tax calculation because interest is taxable when it is paid. And instead of being paid in the year 2006-2007 as she expected, it has been paid in the year 2007-2008.

A tax year runs from 6 April to 5 April. So in 2007-2008 Sue will receive 2 payments of £1500 each, the first on 7 April 2007 and the second on 1 April 2008.

Sue's tax calculations for the years 2006-2007 and 2007-2008 look like this.

Sue's tax calculation for 2006-2007

	Gross	Tax deducted
Earned income	£3000	nil
Interest	nil	nil
Total	£3000	nil
Less personal allowance	£5035

There is no tax to pay during 2006-2007

Sue's tax calculation for 2007-2008

	Gross	Tax deducted
Earned income	£3000	nil
Interest	£3000	nil
Total	£6000	nil
Less allowance	£5225

Taxable income £775 x 10% = £77.50 tax due

Sue should have cancelled her form R85. She will now need to contact her tax office to pay the tax due.