Tax Free Savings

Finding spare cash to stow away for the future can be challenging. Fortunately, there are allowances in place to ensure lower income earners are entitled to tax-free savings income.

Most people can earn some savings interest without having to pay tax. See below our complete guide to tax-free savings. From how your tax is calculated to reclaiming tax when you have overpaid, you will find all you need to know about paying tax on savings interest.

How is my tax on interest calculated?

Your allowance for earning interest tax-free is made up of the following:

Personal Allowance

The Personal Allowance is the amount of income you can earn without having to pay tax. The standard Personal Allowance is £12,500 for the 2019/20 tax year.

Personal Savings Allowance

You also have a Personal Savings Allowance, which is the maximum amount of tax free savings you’re entitled to.  It is calculated based on which tax band you fall into. For Basic Rate taxpayers, the Personal Savings Allowance is £1,000. For more information on the tax free savings allowance, read our complete guide to the Personal Savings Allowance.

Starting Rate for Savings

In addition, the Starting Savings Rate entitles you to up to £5,000 of savings interest tax-free. However, the size of your Starting Rate for Savings will depend on your income. The more you earn from other income, such as your wage or your pension, the less your Starting Rate for Savings will be. You’re not eligible for the starting rate for savings if your other income is £17,500 or more.

For example, if you earn £13,500 your starting rate for savings would be a maximum of £4,000. This is because for every £1 you earn over the Personal Allowance, your Starting Rate for Savings is reduced by that same amount.

Examples

All examples assuming personal allowance of £12,500 and personal savings allowance of £1,000.

Amount of Income

Tax to Pay

Employment Income

Savings Income

£10,000

£5,000

Employment

NIL

Savings

NIL

£17,000

£1,000

Employment

20% on £4,500

Savings

NIL

£14,000

£3,000

Employment

20% on £1,500

Savings

NIL

£17,000

£4,000

Employment

20% on £4,500

Savings

 20% on £2,500

 

What happens if I go over the allowance?

If you exceed the tax allowance, tax will be collected automatically through the pay-as-you-earn (PAYE) system, using information from banks and building societies. If this is the case, you should be issued with a notice of coding.

The types of interest covered

The allowance applies to any interest from:

  • Bank and building societies

  • Savings and credit union accounts

  • Unit trusts, investment trusts and open-ended investment companies

  • Peer-to-peer lending

  • Trust funds

  • Payment protection insurance (PPI)

  • Government or company bonds

  • Life annuity payments

  • Some life insurance contracts

The following does not count towards your savings allowance:

  • Interest from ISAs because they’re tax-free

  • Dividend distributions which are covered separately by the new dividend allowance

  • Reward payments from accounts that are not interest or returns on amounts saved

Other things to be aware of

Joint accounts

Interest earned on joint accounts should be split equally between the two holders. This way, it contributes to each of your respective personal savings allowances.

For example, if the interest accrued on a joint account totalled £500 at the end of the tax year, then £250 would be taken from your allowance and from the second holder’s.

Blind person allowance

The Blind Person’s Allowance is added to your yearly Personal Allowance. So, in addition to the standard £12,500 that you can earn without paying tax, the Blind Person’s Allowance permits an additional £2,450 of tax-free income for 2019/2020.

Marriage allowance

You can claim Married Couple’s Allowance if all of the following apply:

  • You’re married or in a civil partnership

  • You’re living with your spouse or civil partner

  • One of you was born on or before 6th April 1935

The Married Couple Allowance can reduce your tax bill each year if you’re married or in a civil partnership. If you’re eligible, you could see your tax bill cut by between £345-£891.50 a year.

For a specific figure, refer to the Married Couple’s Allowance calculator.

Reclaiming if you have overpaid

You’re eligible to reclaim tax on savings interest if it is below the allowance.

To apply to reclaim tax, it must be within 4 years of the end of the relevant tax year and you will need to fill in an R40 form. It can take up to 6 weeks for this to be processed and for you to receive your tax back.

For more information on paying tax on your savings, speak with our friendly savings team in your nearest Newcastle Building Society branch today or contact us.