In the current tax year, anyone with taxable income of less than £16,850 will have no tax to pay on interest received. This figure is calculated by adding the £5,000 starting rate limit for savings (where 0% of the interest is taxable) to the current £11,850 personal allowance. However, it is important to note that if your total non-savings income exceeds £16,850 then the starting rate limit for savings is unavailable.
There is a tapered relief available if your non-savings income is between £16,850 and £11,850 whereby every £1 of non-savings income above a taxpayer’s personal allowance reduces their starting rate for savings by £1.
In addition to the starting rate for savings, there is also a Personal Savings Allowance (PSA) that was launched in April 2016. This allowance means that for basic-rate taxpayers, the first £1,000 interest on savings income is tax-free. For higher-rate taxpayers, the tax-free personal savings allowance is £500. Anyone earning over £150,000 will not benefit from the new PSA.
Interest from savings products such as ISA’s and premium bond wins do not count towards the limit. So, some taxpayers with tax-free accounts and higher savings can still continue to benefit from the relevant PSA limits. Banks and building societies no longer deduct tax from your account interest as a matter of course. Taxpayers who still need to pay tax on savings income need to declare this as part of their annual Self-Assessment tax return.
Taxpayers that have overpaid tax on savings interest can submit a claim to have the tax repaid. Claims can be backdated for up to four years after the end of the current tax year. This means that claims can still be made for overpaid interest dating back as far as the 2014-15 tax year. The deadline for making claims for the 2014-15 tax year is 5 April 2019.