INTEREST RELIEF

Taxation  of   Interests Received

Most people can earn some interest from their savings without paying tax.

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

·      Personal Allowance

·    starting rate for savings - depending on your other     income

·     Personal Savings Allowance - depending on your Income Tax band

You are given  this allowance each tax year.

Personal Allowance

Interest received up to  the  personal allowance level is not taxed.

Starting rate for savings

You may also receive up to £5,000 of interest tax-free. This is the  starting rate for savings.

It is effective added  to your  personal allowance  as an extension.

If your other income is £16,500 or more

You’re not eligible for the starting rate for savings if your other income is £16,500 or more.

Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

Example You earn £16,000 of wages and get £300 interest on your savings.

Your Personal Allowance is £11,500. It’s used up by the first £11,500 of your wages.

The remaining £4,500 of your wages (£15,000 minus £11,500) reduces your starting rate for savings by £4,500.

Your remaining starting rate for savings is £500 (£5,000 minus £4,500). You don’t pay tax on your savings interest as it is within  the £500. Any interest above £500  will be taxed at 20%  for basic rate taxpayer.

Personal Savings Allowance

You may also get up to £1,000 of interest tax-free depending on your tax band. This is the Personal Savings Allowance.

Savings covered by your allowance

Your allowance applies to interest from:

·         bank and building society accounts

·         savings and credit union accounts

·         unit trusts, investment trusts and open-ended investment companies

·         peer-to-peer lending

·         government or company bonds

·         life annuity payments

·         some life insurance contracts

Individual Savings Accounts (ISAs) and some National Savings and Investments accounts are already tax exempt and do not impact on your interest or savings allowance.

Taxed deducted at source

You can reclaim tax paid on your savings interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year.

Note that bank  and building society  no longer  deduct tax from your bank interests.