How to claim tax free savings interest

Paul Lewis / 11 March 2015 ( 12 June 2015 )

A new tax-free band for interest on savings was introduced on 6 April. Paul Lewis explains the rules around tax on savings and how to reclaim excess tax.



If your total income is below £15,600 a year and you earn some interest on your savings, then you will benefit from the tax-free band for interest on savings which began on 6 April.

The Government says 1.5 million people will benefit and half of them will gain more than £50 a year.

If you have a low income and a lot of savings, you could save as much as £712 a year compared with the previous system. But you will only make any savings if you fill in the correct HM Revenue & Customs form.

The concession means that the first £5000 of interest on savings above your personal tax allowance will be taxed at 0% - so it is tax-free.

Find out about tax in retirement.

Tax on savings interest is determined by your total income

Think of your savings interest as the cream floating on the top of the strong coffee of your other income. The first £10,600 of your income from any sources is free of tax – that is the level of your personal allowance. Above that, another £5000 can be free of tax if it is interest on savings.

But your other income pushes up that interest. So if you have £11,600 of other income, then only the first £4000 band of savings income can be free of tax.

If your other income is £14,600 then only £1000 of interest can be tax free. And if your other income is £15,600 or more, then it has pushed the savings interest above the tax free zone.

So if your total income is below £15,600, then the top slice, which is your savings income, is free of tax.

Make sure you fill in the correct form

You should fill in Form R85 and give it to your bank or building society. That will ensure your interest is paid tax-free in future. If you do not fill in that form then 20% tax is taken off your interest automatically. 

If your non-interest income is less than £15,600 but your total income is more than that, then some of your interest will be tax-free. You cannot fill in a Form R85, so tax at 20% will still be deducted from the whole of your savings income. You will have to reclaim the excess tax taken by filling in another form called R40.

Are you affected by the tax-free band?

To see if you are affected by the new rule, you can use the HMRC calculator. It will show you if you should fill in Form R85 to get tax-free interest or Form R40 to claim overpaid interest back. 

If you have a low income and some interest on savings, you may also be able to reclaim overpaid tax on savings for earlier years.

 

Paul Lewis writes a money column for Saga Magazine. 

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.