Are You Owed or Do You Owe?

November 2017
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Changes made to how interest is taxed may mean that some savers will need to complete a tax return and pay tax due by 31 January 2018.

Since 6 April 2016, tax on interest is no longer deducted at 20% by banks and building societies. Instead taxpayers need to account for this to HMRC and pay any tax due on savings interest by the end of January, following the end of the tax year. 

When this change was introduced, the Government also introduced a new savings allowance of £1,000 per year for basic rate taxpayers and £500 per year for 40% taxpayers. Top rate (45%) taxpayers don't get this allowance. As with any change of this nature there are winners and losers.

Nil Rate Taxpayers

Savers with total taxable income of less than £17,000* in 2016/17 and £17,500* this year will have no tax to pay and will be up to £200 per year better off. They will no longer need to reclaim overpaid tax on their savings.

They can still claim back overpaid tax for 2013/14, 2014/15 and 2015/16 when 20% tax was deducted at source, if they did not owe tax then. Reclaims can only go back 4 years so that on 6 April 2018 the 2013/14 year is lost.

Non taxpayers who are married/civil partner to a basic rate taxpayer may also wish to take advantage of the transferable married couples’ allowance. This enables 10% of the personal allowance to be transferred to the other spouse/partner and can save a further £230 this year and £220 for last year. See Making the Most of Independent Taxation Article.

Basic Rate Taxpayers

Basic rate taxpayers (taxable income up to £43,000 in 2016/17 and £45,000 this year)** will also be up to £200 a year better off. However if more than £1,000 of taxable interest has been earned, they will need to report the excess via self assessment and pay tax on it. 

High Rate Taxpayers

Those paying tax at 40% (taxable income between £43,000 and £150,000 in 2016/17 and £45,000** and £150,000 this year) need to report and pay 40% tax on any interest over £500 per year. The change gives them an extra £100 per year of tax free interest. 

Top Rate Taxpayers

Will get no savings allowance and all of their interest will be taxable through self assessment at 45%. 

Do I Need To Report Interest Earned to HMRC?

If the interest earned exceeds the allowances as set out above, you must tell HMRC about it and pay any tax due before 31 January. Not reporting this untaxed income and paying the tax due on time builds up a debt, and could result in interest and penalties being applied by HMRC.

To avoid unnecessary tax on savings, it is worth making use of other allowances and different types of investment, which allow savers to keep more of their interest without tax becoming due. 

These include:-

  • Individual Savings Accounts, up to £20,000 per tax year can be invested by over 18s, with no tax to pay on interest or dividends. 
  • Investment bonds issued by UK insurance companies, allow tax on interest received in the fund to be taxed on the insurance company, basic rate taxpayers have no further tax to pay and higher rate taxpayers can defer the additional 20% liability until funds are withdrawn.
  • Pension plans do not have to pay tax on the interest earned within them, income tax is paid as and when withdrawals are made from them. Pension contributions made personally also attract income tax relief at the highest rate payable by the individual. These are available until age 75.
  • Gift aid donations can enable, otherwise higher rate taxpayers, to reduce their liability to the basic rate band.
  • If there is capacity to bear losses on the investment, converting some interest bearing savings into shares in investment funds can enable dividends to be earned tax free, up to £5,000 per year currently, (£2,000 from 2018/19) See Shareholders Set To Receive Record Dividends Article.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.

* Where other taxable income is less than the personal allowance, £11,000in 2016/17 and £11,500 in 2017/18, the first £5,000 of savings income is taxed at 0%.

** UK except Scotland, £43,000 in Scotland

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