Bank and building society interest - Key information

How is bank and building society interest taxed?

Banks and building societies are required by law to deduct income tax at 20% from interest before they pay it to you. They pay this to HM Revenue & Customs.

If you are not due to pay any tax you can register your bank or building society account to receive your interest without tax taken off. You do this by completing form R85 and giving it to your bank or building society. The form R85 (PDF 72K) comes with a R85 helpsheet (PDF 42K) to help you decide whether you are not due to pay any tax.

See an example of registering for interest without tax taken off.

If you are only due to pay a small amount of tax (you fall within the 10% tax bracket) you may be able to claim back some of the tax taken off.

See an example of a saver who only pays a small amount of tax.

Can I complete form R85?

If your total taxable income is less than the tax free allowance you are due, you can complete form R85 and receive your bank or building society interest without tax taken off.

The R85 helpsheet that accompanies the form R85 will take you through this calculation step by step. Or you can do this calculation online.

What income is taxable?

Not all the income you receive may be taxable. Some things you need to include in working out your taxable income are;

  • Company dividends
  • Interest from banks and building societies - include the amount before tax was taken off and only include your share if it is a joint account
  • Jobseeker's allowances
  • Earnings
  • Pensions – both state and company
  • Taxable incapacity benefit

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What income is not taxable?

When you are working out your taxable income you do not have to include;

  • Attendance Allowance
  • Child Benefit
  • Child Tax Credit
  • Interest and terminal bonuses under Save As You Earn schemes
  • ISA interest
  • Pensioner’s Christmas Bonus
  • Pension Credit
  • Premium Bonds
  • National Lottery winnings or gambling prizes
  • Student Loans
  • Winter Fuel Payment
  • Working Tax Credit

When is interest taxable?

Your interest is taxable in the tax year that it is paid to you, or credited to your account, even if part of it has accrued in the previous tax year. So you do not have to include any interest earned this year when working out your taxable income if it hasn't been paid yet.

See an example of how interest is taxed when it is paid.

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How are term bonds taxed?

A term bond is a bond that pays interest at a specified time, maybe five years from the date it was taken out. For example, National Savings & Investments has Pensioner Bonds that can last for 1, 2 or 5 years.

Interest is taxable in the year it is paid. So, for example, if a bond matures on its fifth anniversary and all of the interest which has accrued since it was taken out is paid on that date, the total amount of interest is taxable in that one tax year.

This could mean that you could be a non-taxpayer during the term of the bond, and therefore be eligible to register other bank or building society accounts (using form R85) to receive interest without tax taken off and / or to make Gift Aid donations.

However, the amount of interest paid when the bond matures, together with any other income you receive, may be such that you are liable to pay tax for that particular year. If this is the case you must tell HM Revenue & Customs.

If you do not know how to contact HM Revenue & Customs you can find the address and telephone number here - contact us.

If you are due to pay tax in the tax year the bond matures this will affect your eligibility to register your savings accounts to receive interest without tax taken off and / or to make Gift Aid donations.
Estimating your income for the year in which the bond matures will help you plan ahead to pay any tax bill that arises or make the most of your income tax personal allowance.

See an example of how term bonds are taxed.

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How often should I complete form R85?

Once you have completed and handed in the form R85 to your bank or building society your interest will be paid without tax taken off until you or we cancel the form. But children have to complete a fresh form R85 to continue getting interest without tax taken off after their 16th birthday.

You can register more than one account with the same bank or building society on a single form R85, providing the account numbers are shown clearly in the boxes provided. Separate forms R85s are required for different banks and building societies. If you open a new account, and you are still entitled to receive interest without tax taken off, then you must complete a separate form R85 for the new account.

What if my circumstances change?

If your savings increase or you start to receive income from a new source you may no longer be entitled to have your interest paid without tax taken off, for example, if you;

  • Start getting a pension, including a state retirement pension or
  • Start a job or business.

It is important to check that your income is less than your tax-free allowance from one year to the next.

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