Tax on savings

The taxation of savings income has a few unusual features. These include:

• A special starting rate of tax of 10% available in limited circumstances
• Separate treatment for company dividends
• Taxation at source is the norm; though some taxpayers are able to register to receive interest payments gross of tax

You can find out more about this in our website  section: Taxation of Savings.

The key points to note if you are a pensioners are:

1)      If your total income is less than your tax free personal allowance, you can apply to have bank and building society interest paid to you without deduction of tax. To see if you qualify to receive interest without deduction of tax use the HMRC’s R85 checker at http://www.hmrc.gov.uk/calcs/r85/.

2)      The 10% tax credit on dividends covers your liability to tax at basic rate, but it is not refundable. So, if your total income is less than your tax free personal allowance and you have dividend income, you will not get a tax refund. If your total income after deducting your tax free personal allowance is more than £35,000 (using 2011/12 rates) then you will have more tax to pay on your dividend income.

3)      If your total income is less than your tax free personal allowance plus the 10% starting rate for savings and you have bank interest which is taxed at source, you may be due a tax refund. For people aged 65 -74, your pension income (strictly ‘non-savings income’) must be below £12,500 (in 2011/12). For people aged 75 or over the limit is £12,650 (in 2011/12). Use the tax checker http://www.hmrc.gov.uk/calcs/r85/. to see if you are due a refund. You can apply for a refund on form R40 repayment claim form. For more information on how to claim a refund, and to obtain a copy of the R40 repayment claim form, go to http://www.hmrc.gov.uk/tdsi/claim-tax-back.htm

For more information on the 10% starting rate for savings see the guidance on the HMRC website at http://www.hmrc.gov.uk/tdsi/ten-per-cent-guidance.htm