The regular hikes in the bank base rate since the end of 2021 have been welcome news for savers, if not for hard pressed borrowers.
It has meant that many more people are now receiving interest on their (non-ISA) deposit accounts which is not covered by the “personal savings allowance” (“PSA”), which is available as follows
|Basic rate taxpayers||£1,000|
|Higher rate (40%) taxpayers||£500|
|Additional rate taxpayers||£0|
There is also another relief available for people with income below £17,570. This is called the “starting rate for savings” and can amount to a further £5,000 of tax relief for interest. The full relief is due if your non-savings income and interest do not exceed the total of the personal allowance (£12,570 for 2023/24) and the starting rate band of £5,000. If the non-savings income and interest exceed that figure of £17,570, up to £1,000 of the excess can be covered by the PSA, so a total of £18,570 of income can be free of tax. The Lower Income Tax Reform Group have produced an example which shows how the reliefs work in practice, and this can be found here.
Interest has not been taxed at source for many years, so any income tax chargeable on it has to be paid by the recipient.
HMRC now receive details from banks of interest paid on their accounts, so will be aware when someone is due to pay tax, and the way that they will collect it will depend on whether the taxpayer submits self-assessment returns or has a salary/pension which is paid though PAYE. HMRC has made a lot of effort to move people out of the self-assessment system in recent years, so it will be up to the everyone who is outside the system to inform them of any taxable interest. This is most easily done by setting up an online Personal Tax Account and notifying the amount of interest received in the previous year before 6 October following the end of that tax year, after which HMRC will issue a demand for the tax or amend the PAYE code. Unfortunately, the bank notification system is not yet as accurate as it might be, so it cannot be relied upon to give the correct figures. If a demand is issued, or a PAYE code altered, based on information that you have not submitted, it needs to be carefully checked.
The ”triple lock” provisions applied to increases in the state pension have been good news recently for those who qualify for them, but they also have a sting in the tail as far as tax is concerned because the additional income may restrict the amount of the starting nil rate band for savings and cause tax to be payable on interest. This is another reason why older savers have to be careful to check their tax position each year to work out whether or not they need to notify HMRC of their interest income, particularly where there is no occupational pension from which the tax can be deducted by adjustment to the PAYE code.
Author: Michelle Baldwin, Assistant Tax Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 02 October 2023