By law, banks and building societies are required to deduct income tax at 20% from interest on savings. Most of the time, this is done automatically without us even knowing. However, similar to dividends, there are different rates of tax on savings dependant on income. And, if you have a low income, you may even be able to claim tax back!
So, there are 4 different tax bands when it comes to savings, and before we tackle this, you should be aware that savings income is added to your total income after tax-free allowances have been taken into account, such as your personal allowance. So, the tax bands for 2013/2014 are as follows:
Starting rate (10%): taxable savings income that falls below £2,790 is taxed at 10%.
Basic rate (20%): taxable savings income that is above £2,790 (starting rate) and below £32,010 (basic rate) is taxed at 20%.
Higher rate (40%): taxable savings income that is above £32,010 (basic rate) and below £150,000 (additional rate) is taxed at 40%.
Additional rate (45% from 6th April 2013): taxable savings above £150,000 (additional rate) is taxed at 45%.
Getting tax-free interest on savings
If your total taxable income is less than your personal allowance then you may be able to:
- Register to get savings interest paid tax-free
- Reclaim tax
To register to get savings tax-free, you will need to fill in an R85 form and send it to your bank/building society as soon as possible.
If you think you have paid too much tax, then you must fill in an R40 tax repayment form, for each year you think you’ve paid too much tax.
When is interest taxable?
Your interest on savings is taxable the year it is paid to you, or credited to your account.
If you complete a self-assessment, it is essential that you declare:
- The amount of interest after tax was deducted (net amount),
- The amount of tax deducted before your received the payment,
- The sum of the two above (gross amount).
If you need more information regarding your savings, contact your building society/bank as soon as possible to request a ‘certificate of tax deducted.’