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If your summer holiday is going to cost a fortune, you might be looking for ways to replenish your bank account! Why not check to see if you are eligible for the 0% savings rate on your savings income (interest).It’s quite easy to do. First, look to see;

  • If you are paying tax on your savings income.
  • If your taxable income (ignoring savings income) is below £15,600 (£15,660 if born before 6th April1938).

Yes? Then read on…

The new 0% savings rate of tax on savings income has replaced the previous 10% rate of tax on savings income since April 2015. The amount of savings income that can benefit from the new rate was also increased from £2,880 to £5,000 – the intention being that lower earners won’t have to pay tax on their savings income.

To see how the rate applies to you, add up your total taxable income (things like wages, pensions, taxable benefits and savings income).

  • If the total is less than your personal allowance (£10,600 – or £10,660 if you were born before 6/4/1938) plus £5,000, you will be eligible to register for tax-free savings with your bank or building society. This is done by completing form R85, which instructs them to pay you your interest without tax being taken off.
  • If your non-savings taxable income is under your personal allowance plus £5,000, but your savings income takes you above this figure, you will be eligible for 0% tax on that part of your savings income below the limit and will pay 20% on the part above. In this case you will not be able to sign an R85 but will be able to claim back the overpaid tax using form R40.

An example may better explain:

Under the new rules a 67 year old (2015/16) with a pension income of £15,000 and savings income of £400 won’t pay any tax on their savings income. However, if the pension income is slightly higher at £15,300 they would pay nothing on the first £300 of savings income and 20% on the last £100, and if slightly higher again at £15,600, they will pay 20% on all of their savings income. Please note that an R85 can only be signed in the first example.

While checking the new rates, look back to make sure you haven’t missed out on the old 10% rate. If you have, you can ask HMRC to repay any overpaid tax going back to the 2011/12 tax year.

And just when it makes sense….

It’s going to change again. From April 2016 the Personal Savings Allowance (PSA) is being introduced, which means that most people will not pay tax on the first £1,000 (or £500 for higher rate taxpayers) of income they earn on their savings.

More importantly, banks and building societies will no longer take tax from savings income and it will be up to individuals to inform HMRC if they are due to pay tax. This means that from April 2016 you will need to consider both the 0% savings rate rules and the PSA rules to see if you should inform HMRC and pay tax on your savings income. For most of us, who are basic rate taxpayers with less than £1,000 in savings income, it will be much simpler with nothing to worry about and nothing to do. (Honest!)

Please note that people with incomes up to £42,700 will be eligible for the full £1,000 of allowance, whereas those with incomes between £42,701 and £150,000 will have a £500 allowance and those with incomes above £150,000 get no tax free savings at all.