From April interest will be paid to savings accounts gross.
At present, in general, banks and building societies deduct 20% tax from the interest earned on non-ISA savings before paying the interest to the account holder.
From 6 April 2016 banks and building societies will not deduct tax from interest received, so all interest will be paid or credited to the savings accounts gross.
Personal savings allowance
From 6 April 2016 personal savings allowances are being introduced as follows:
- a basic rate taxpayer will be able to receive up to £1,000 of interest per year tax free on their savings
- a higher rate taxpayer will be able to receive up to £500 of interest per year tax free on their savings
- an additional rate tax payer will not have a personal savings allowance.
Earnings Interest Received Treatment from 6 April 2016
£20,000 £250 No tax to pay on interest as £250 within the £1,000 personal savings allowance
£20,000 £1,400 Interest exceeds personal savings allowance by £400, so tax on this at the taxpayers’ marginal rate of 20% would amount to £80
£70,000 £450 No tax to pay on interest as £450 within the £500 personal savings allowance
£70,000 £2,100 Interest exceeds personal savings allowance by £1,600, so tax on this at the taxpayers’ marginal rate of 40% would amount to £640.
Effect on notice of coding
For taxpayers under the PAYE regime, in general they will have their tax code adjusted to collect tax due on interest received in excess of their personal savings allowance. However, many taxpayers have received adjustments that are not applicable.
HMRC has produced a brief guide with further information.
Article from ACCA In Practice