At the beginning of the UK fiscal year 2016, a new personal savings allowance was introduced. From April 6th, 2016, banks and building societies in the country started to pay gross interest to all customers, instead of automatically deducting 20%, in line with the basic rate of income tax. You may still be liable for a certain amount of tax on the interest you receive on your savings, but only if it exceeds the new personal allowance that applies to you.
Will You Still Have to Pay Tax on Personal Savings Interest?
Whether you will still be liable for tax on your savings interest will depend on exactly how much interest you receive during the course of each fiscal year.
- Basic Rate Taxpayers – The new personal allowance for basic rate taxpayers is £1000. If the gross interest you receive on your savings accounts during the course of the year is £1000 or less, you will not have to pay any tax on it. If you are lucky enough to find a savings account that pays 1.5% interest, you would need to have more than £66,666 in the account before you became liable for tax on the interest paid.
- Higher Rate Taxpayers – Individuals whose income takes them into the higher rate of tax (40%) will receive an allowance of £500. This means that if part of your salary attracts the higher rate of income tax, you would need to have more than £33,333 in a savings account, paying 1.5% annual interest, before you became liable for tax on interest received.
- Additional Rate Taxpayers – Unfortunately, for those whose income attracts the top rate tax of 45%, there is no personal savings allowance. You will still have to pay tax on all of the interest paid to you on your savings.
Calculating Your Tax Liability on Interest Received
When you are calculating whether you will still be liable to pay tax on interest received, you should bear in mind that any interest earned from an ISA will not count toward your annual allowance. If you have invested in any fixed-rate bonds however, the interest from these will be counted but it will be averaged over the term of the bonds in question. For example: If you invested in a £10,000, 5-year bond that pays an annual interest rate of 2.9%, you would receive £10,290 when the bond matures. However, the £290 interest you receive would not be counted toward your allowance for that tax year alone; it would be spread over the 5 years that the bond was held. In other words, for each year the bond was held, £58 of interest would be counted toward your annual allowance.
We should point out that there are various types of fixed-rate bonds available in the United Kingdom and the above example is just that, an example. For the sake of simplicity, we did not compound the interest when making our calculations or differentiate between accessible and non-accessible bonds. Exactly how the interest is calculated as part of your personal allowance and when it may become taxable will depend on the type of bonds that you have purchased. If you are not sure how the interest on your own personal bonds will be counted toward your annual personal savings allowance, you can contact the appropriate Revenue and Customs department and ask them directly by getting in touch with HMRC here.
Given the current low rates of interest on savings accounts in the UK and the fact that most people do not have over £66,666 in interest-bearing accounts or fixed-rate bonds, the majority of the population will no longer have to pay any tax on the interest they receive on their savings. However, if you think your annual interest receipts will take you close to the limit, it is important to remember that any interest you receive on your current accounts will also be counted toward the total allowance. Basically, interest received from any non-ISA accounts or bonds should be included in your calculations.
How Will Tax Be Collected?
Those who will still be liable for tax on some of the interest they receive from their savings may be wondering how the government is proposing to collect this tax, given the fact that banks and building societies will now be paying interest gross, with no tax deducted. The government has stated that it will adjust individuals’ tax codes to take account of any interest they receive that is taxable, so for those in full-time employment, it should be deducted via the PAYE system. For those who are self employed, an annual tax return will still have to be completed and interest received on savings and bonds will naturally have to be declared so that your annual tax liability can be accurately calculated.