From 6 April, basic and higher-rate taxpayers have been provided with a personal savings allowance. For those on the basic-rate they can save up to £1,000 tax-free, while those on the higher rate now have an allowance of £500 tax-free. However, those on the additional rate do not receive a savings allowance.
The interest can come from money held in high street current and saving accounts, National Savings and Investments products, peer-to-peer loans, corporate bonds and gilts.
Prior to 6 April 2016, 20 per cent tax was automatically deducted on savings interest. The only exemptions were for those on low to no income, such as children and pensioners, who could apply to have interest paid gross.
From the start of the new tax year, all savings interest is now paid gross. HM Revenue & Customs (HMRC) will collect any tax owed either by adjusting a saver’s tax code and collecting it through Pay As You Earn (PAYE) or via an individual’s self-assessment tax system.
However, in order to get the tax code right savers will have to confirm to HMRC if they have breached their personal savings allowance and it will then be the Revenue’s responsibility to collect any outstanding tax.
HMRC has already begun adjusting individuals’ tax codes to incorporate any tax it believes is owed. It is important to check this code is correct and to contact the Revenue if you believe it is not.
The majority of employees in the current tax year will receive code 1100L – which represents the £11,000 most people are allowed to earn before paying tax (the personal allowance) this year.
If the number on the code is lower HMRC is likely to be taking off tax owed on savings interest following the introduction of the personal savings allowance, but in every case it is best to check. Those who think the code is wrong should call 0300 200 3300. Guidance on codes is available at gov.uk/tax-codes.