How are savings and investments taxed?
June 2010
When you start a savings plan or make an investment, you need to understand what tax implications there might be.
The product literature will clearly state which taxes may apply to you and the product you are considering, but each may involve a different set of calculations.
As in all savings and investment decisions - if in doubt ask your provider, or an independent financial adviser, for clarification.
Basic rate taxpayers
The interest you receive on your savings is taxed as income. Normally, bank and building society savings accounts assume that you are a basic rate taxpayer (which is 20% for 2010/11), with savings tax being the same, at 20% – and deduct this tax before adding the net interest to your account.
Note: The interest you receive could turn you into a higher rate taxpayer.
However from 6 April 2008, the 10% starting rate was removed for earned income but continues to be available for savings income and capital gains. So, if your sole income is from savings interest, you should be paying savings tax of only 10% on the first £2,440. But remember if your taxable non-savings income is above this limit then the 10% starting rate for savings will not apply. Many banks and building societies' systems may be unable to cope with this so you will have 20% deducted at source. You can reclaim the extra tax every April by asking HM Revenue & Customs for an R40 form.
Higher rate taxpayers
If you are a higher rate taxpayer (which will remain at 40% for 2010/11) you will need to pay this rate on the interest from your savings.
Since many savings providers deduct savings rate tax of 20% at source, you will have to make up the difference (20%) – usually as part of your self-assessment annual tax return. If you owe this extra tax, it is your responsibility to complete a self assessment tax form and pay the tax.
Additional rate taxpayers
Since April 2010 a new rate of Income Tax of 50% has applied to those with an income over £150,000 a year, which will in turn apply to the interest from your savings. Again, if your savings provider has already deducted savings rate tax of 20% at source, you will have to make up the difference (30%).
Also, the Income Tax Personal Allowance will be reduced for those with incomes over £100,000, tapering down to zero.
For more information about the different tax bands and personal allowances, visit the Directgov website.
Non-taxpayers
If you wish, you can elect to receive gross interest (interest without tax deducted) as part of HM Revenue & Customs' Tax Deduction Scheme for Interest (TDSI). You will need to complete Tax Form R85 - which you will be able to pick up from your bank or building society or other savings provider. You can also download the form from the HMRC website.
Note: The interest you receive could turn you into a taxpayer and it is your responsibility to pay the tax.
National Savings and Investments (NS&I) was excluded from the legislation when the TDSI was introduced by government because it was seen as offering traditional savings products that were mainly held by those not liable to pay tax. As such, any non-taxpaying customers that have any NS&I investments that pay interest net of tax should instead claim the tax back from HM Revenue & Customs.
For more information about the Tax Deduction Scheme for Interest, visit the HM Revenue & Customs website.
Fixed term plans
Some savings plans pay interest at the end of a fixed term, for example after five years with some Guaranteed Equity Bonds. This money may be paid gross (without tax being deducted).
Your tax position in the year that interest/the return is paid will determine the amount of tax you may owe. So a basic rate taxpayer may become a higher rate taxpayer towards the end of the term - and will need to pay tax at this rate on the whole of the return.
Capital Gains Tax
While most savings plans attract Income Tax on the interest or the return - others may make you liable for Capital Gains Tax (CGT).
CGT is a tax on capital ‘gains’. If, when you sell or give away an asset, it has increased in value, you may be taxed on the ‘gain’ (profit). This doesn't apply, for example, when you sell personal belongings worth £6,000 or less and, in most cases, your main home.
You get a special tax-free CGT allowance that means you only pay CGT on any gain over £10,100. The rate of CGT starts at 18%, increasing to 28% for higher rate and additional rate taxpayers (2010/11).
