Thankfully, you can reclaim money that has been taken from you unnecessarily, so if you think that you’ve paid tax on your savings when you shouldn’t have, you may be able to benefit from a refund.
How savings are taxed
If you have a savings account with a bank or building society, any interest that you earn on the money that you place into the account is classed as income, and is therefore taxable.
The interest a person receives on their savings is used to calculate their overall tax liability, along with any other income earned or received.
Usually, 20 per cent of a person’s earnings are taken by the taxman. This applies to both regular income in the form of wages, and also to interest received on savings. However, higher rate tax payers, who earn between £31,866 and £150,000 a year, pay 40 per cent, while additional rate tax payers on more than £150,000 a year pay 45 per cent tax on their savings interest.
The good news is that everyone has an annual tax-free allowance that currently stands at £10,000. Even better, it is due to increase to £10,500 in May 2015, with David Cameron pledging that if his party stays in power, it will increase to £12,500 in future. The tax-free allowance means that you will only pay tax on money you earn that is above the set figure. If you earn less than this amount per year, you shouldn’t be paying tax at all. This is not only applicable to income, but savings interest too.
Reclaiming tax paid unnecessarily
If you believe that you are eligible for tax-free interest on your savings, you will need to register with your bank or building society using the R85 form which is available from HM Revenue & Customs (HMRC). It may also be possible to register over the phone.
The HMRC website also has an R85 tax-free interest checker to help you to confirm whether or not you are entitled to this benefit.
Don’t worry if you find that you have been paying too much tax on your savings for a while because there are ways of reclaiming the tax you have paid for previous years too. By filling in an R40 form for each year that you believe tax was taken from you unnecessarily, the money should be returned.
If you’re looking to save a large amount of money each year without paying any tax at all on the interest you receive, an individual savings account (ISA) is a great way of protecting your savings from the tax man.
Until July this year, ISA accounts allowed savers to save up to £11,880 a year tax-free, but now, thanks to the introduction of the new ISA, (NISA) savers now have a higher allowance and can save up to £15,000 per tax year in this account. Since all interest accumulated on this amount will be tax-free, ISA savers will benefit from a great savings boost.
NISAs also offer savers more flexibility and the chance to divide their savings between cash and stock and shares accounts. With the original ISAs, there was a cap on the amount that could be deposited into a cash account, meaning that savers could only save £5,940 in cash, while the remaining allowance had to be in stocks and shares.
About Aldermore Bank
Aldermore Bank is a dedicated supporter of UK savers. To find out more about our cash ISA and savings accounts, please don’t hesitate to contact the team
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