Time to claim £5,000 in tax free interest

SAVERS are baffled by a new tax rule that came into effect in April. This lets you earn up to £5,000 in savings interest without paying any tax.

But how much of this allowance you can claim depends on the source of your income — it’s the split between your savings and non-savings income that counts.

Those whose salary, pension or other ‘non-savings’ income totals more than £15,600 (£15,660 if you were born before April 6, 1938) can’t claim the special tax break.

But you can get it if your total income from non-savings is below this level. Depending on your salary, you can register as a nontaxpayer or claim back some of the tax automatically deducted from your savings.

which you do depends on the split between your savings and non-savings income.

To work out which category you’re in, add up your total nonsavings income. This includes salary, pensions, benefits, dividends and rental income from any second home or buy-tolet investments.

Don’t add in your interest from your savings accounts, but tot it up in a separate column.

Ignore all interest you earn on your cash Isas and other taxfree savings, such as Premium Bonds and National Savings & Investments Savings certificates.

If your non-savings total is less than £10,600 (£10,660) and your savings interest is less than £5,000, you don’t have to pay any tax — so you can register as a non-taxpayer with your bank or building society. For example, if you earn £3,000 before tax in interest from your savings and £7,000 from your pension, your total income is £10,000 — or £600 less than the personal allowance. In this case, you are deemed a non-taxpayer.

You can also register to have interest paid before tax if your non-savings income breaches the £10,600 (£10,660) limit but, after adding in your savings income, you don’t go over the £15,600 limit.

For example, if your salary is £11,000 and your savings income £3,000 (a total of £14,000), you are under the limit.

To get the interest paid before tax is deducted, fill in form r85, which is available from banks or building societies. They automatically deduct 20 pc tax if you don’t.

Fill in a separate r85 form for each of your taxable accounts. Don’t fall into the trap of thinking one form will cover your easy-access account and the fixed-rate bonds you hold with the same bank.

If your savings interest is a joint account, the interest is typically split 50/50 by the taxman. If you are both non-taxpayers, you both need to fill in the r85 form.

If one of you is a taxpayer, but the other is not, check to see whether your bank or building society allows you to receive half after tax and half before.

If not, you will have to reclaim the tax from Hm revenue & customs. If the sum of your savings and non-savings limit is higher than £ 15,600 — the so-called ‘starting rate for savings limit’ — you can’t register as a non-taxpayer.

However, you can claim back some tax as long as your nonsavings income is not higher than £15,600.

For example, with £2,000 savings interest plus your £14,000 pension, your total income is £16,000. But you still have £ 1,600 (£15,600 minus £14,000) to use up in the starting rate for savings limit. So you can claim back the tax paid on £1,600 of your savings income — or £320 (20 pc of £1,600) — but not on the £400 (£ 16,000 minus £15,600) that puts you over the starting rate for savings limit. If your pension is £15,600 and savings interest £400, you can’t reclaim any tax.

To claim back the tax, fill in form r40, which is available at the gov.

uk website, or call 0300 200 3610.