Since April 2016, most banks and building societies pay interest without deduction of tax – here’s what you need to know
Savings income (which includes all types of interest) has been paid net of basic rate tax for many years but this ended in April 2016. Now most deposit takers (banks and building societies) pay interest without deduction of tax. This doesn’t apply to interest paid on loans to your company.
For 2016/17 there is a new personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Within this band, the savings income is taxed at 0%. There is an additional £5,000 band of 0% tax known as the savings starting rate, which is available to taxpayers with very low non savings income.
For higher rate taxpayers, there is the question of how much of their savings income has to bear extra tax. In determining this, the general rule is that savings income is treated as the ‘top slice’ of income, with dividends being the ‘top slice’ of savings income, although the terms savings income and dividend income are treated as separate for the purpose of tax rates.
This is best illustrated by examples of individuals who have exactly the same savings income in 2016/17, but different other income (for simplicity, treated as being after application of all allowances). The treatment of dividends is more complicated and they are therefore excluded.
Suppose the savings income is received as follows:
|Bank interest||£1,600 net||(£400 tax deducted)||£2,000|
|Building society interest||£3,200 net||(£800 tax deducted)||£4,000|
|Mr Black||Mr Smith||Mr Brown||Mr Green|
|Other taxable income||£1,000||£10,000||£31,000||£45,000|
|Total taxable income||£7,000||£16,000||£37,000||£51,000|