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Tax on Bank and Building Society Accounts

By: J.A.J Aaronson - Updated: 4 Nov 2012 | comments*Discuss
 
Income Tax Bank Building Societies

The rise in availability of savings schemes such as ISAs and Premium Bonds has meant that many people now save money totally tax-free. However, the majority of savings accounts, as well as regular bank accounts that are in credit, are normally subject to a 20% or 40% tax, depending on which tax bracket you fall into.

If you are a basic rate (20%) taxpayer and you have a bank or building society account, tax will have been deducted at a rate of 20% before you even receive your interest; this is why the interest credited to your account will appear as 'net interest' on your bank statement. In almost all circumstances, your savings will be taxed in this way, and it is then your responsibility to either reclaim over-paid tax or pay tax that you still owe.

Tax Rates

In the first instance, it is important to note that savings income is added to your other income for tax purposes. After this, savings with a value of between £2,560 and £35,000 will be taxed at the 20% that you are likely to have already paid through your bank or building society. If, however, your savings fall below the £2,560 threshold, you will only be required to pay tax at 10%. This affects very few people, as income and savings exceeds this threshold for the vast majority of tax-paying individuals. Conversely, if your accumulated income and savings exceed the £35,000 threshold, you will be required to pay tax at 40%. If that income exceeds £150,000, you will pay tax at 50%.

Receiving Refunds

It may come as no surprise to hear that reclaiming over-paid tax is generally a longer process than paying tax that is owed. The way in which you reclaim tax will depend on how much you should actually have paid; if you pay no tax at all, then you need to contact your Tax Office to receive a copy of form R85. This will ensure that arrangements can be made for you to receive tax-free interest in the future, and for you to reclaim your over-paid tax.

Paying Outstanding Tax

Making payments for tax that is due can represent some extra work, but it is generally the case that your payment will be taken more quickly than payments will be made to those who are owed refunds. To begin with, it should be noted that you are not required to make any other payments if you are a basic rate tax-payer, even though you are only taxed at 20%. The difference is yours to keep. However, if you are a higher rate taxpayer, it is your responsibility to inform your Tax Office of how much interest you have received. Again, the way in which you do this will depend on your circumstances.

If you are a self-assessment taxpayer, the process is simple; you just need to declare your savings interest on your tax return, and HM Revenue & Customs (HMRC) will calculate accordingly. Similarly, if you completed a Self-Assessment form during the previous tax year but now pay tax through PAYE, your outstanding tax will be automatically deducted from your wage packet via PAYE.

If, on the other hand, you do not normally pay tax via self-assessment, but you have recently shifted into the higher tax bracket, it is your responsibility to contact your Tax Office to let them know how much interest you have received. It is likely that you will then be asked to complete a return, unless you are an employee or paying a pension, in which case your outstanding tax may be collected via PAYE.

Finally, if you are no longer required to complete a tax return, it is likely that you will receive a copy of form P810 (the Tax Review Form). This will require you to give some information about your current savings levels in order that HMRC can make the relevant calculations.

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