e-mail Paul Lewis on paul@paullewis.co.uk
A month ago, my colleague Merryn Somerset Webb gave us a timely reminder that rising interest rates, although bad news for our children and grandchildren with mortgages and debts, were actually good news for most people – most Saga readers certainly – who find that at last our savings can bring us a bit of an income.
But while careful readers may be earning 5 per cent or even more on their tankful of cash, who is that underneath with a spanner siphoning it off again? Yes, it’s Gordon Brown! Or rather someone working for him. While Gordon is sitting in 11 Downing Street, the staff at our local bank or building society are under our savings tank draining some of it out again. Because by law they have to take one pound in every five that our savings earn and pass it over to the Inland Revenue.
They do this for everyone, rich and poor alike, to make sure that tax is paid on the money earned by our savings. It is a very rough and ready system and it works to the Government’s advantage. Because there are millions of people – including six million over 65 – who should not be paying tax at all. But the tap is still turned on to drain off a fifth of the interest they earn.
You can stop them if you fill in a form but of course, many of the people who should fill in the form do not do so. Partly because most of us have better things to do than fill in forms. And partly because many of us find it hard to believe that a British Government would take money off us that it was not entitled to. But it does.
Four years ago the Inland Revenue had a look at this automatic deduction of tax and estimated that over the past few years it had taken £300 million off four million people who should have paid no tax at all. Three years later it said about a million of those had claimed some money back. But it could not say how many were still owed tax nor how much they were now owed. Pensioners, children, married women, unemployed people, part-time and low paid workers and anyone else who has a low income but some savings are all affected.
So this month if you do nothing else make sure you are not one of the millions of people paying more tax than you should on your savings.
Tax free income
Each year we are all allowed to have a certain level of income before any
tax is due. The amount depends on your age. If you are under 65 then you can
have £4745 income in this tax year before any tax is due. At 65 that tax-free
level rises to £6830 and to £6950 at age 75. People who are blind can add £1560
to these amounts. And your age is counted on 5 April 2005 – so even if you are
64 now you may get the higher allowance if it falls before the end of the tax
year. If your income is below these levels you should make sure no tax is being
deducted from the interest paid on money in your bank or building society. When
you work out your income you do not count any pension credit you may get.
Some married men are in a special position. Before April 2000 all married men could have extra income before they paid tax. The married couple’s allowance (MCA) was scrapped for most people from that time. But it still exists for couples where either partner was born before 6 April 1935. Married men who get the MCA should not pay any tax on the income from their savings if their total income is less than £10,534. In some cases it can be higher – up to £10,737.
You can stop tax being deducted by filling in a form called R85 which you can get from your bank or building society or from the Inland Revenue. Make sure you get the latest version which comes with a useful Helpsheet to work out if you can get interest paid gross. Once filled in and sent off, the people with spanners should stop draining money from your account and pay the interest in full – or ‘gross’ as it is called. So if you earn £100 interest you get the whole lot instead of £80 for you and £20 for the Chancellor.
The automatic interest deduction applies to every bank and building society account. So if you have a current account – most of which do pay some interest – or a savings account and an income below these levels, you should fill in the form.
These rules apply just the same to joint accounts. But in this case half the interest earned on the account belongs to each partner. So if both of you have an income low enough to pay no tax, you should each fill in the R85 form. If only one of you is in the no-tax category, then fill in one form and your bank or building society should pay your half of the interest gross. However, some may not. In that case you have to claim back the overpaid tax. There is more about how to claim back tax later.
Double Tax
If your income is a bit above the amount to get tax-free interest, you may
still be paying twice as much tax as you should. That is because the next £2020
of income above those tax-free limits is only taxed at 10 per cent, but tax is
still deducted at the full 20 per cent. So if your income is up to £6765 if you
are under 65, £8850 if you are 65 to 74 or £8970 if you are over 75 then you are
paying too much tax on your savings. People who are blind can add £1560 to these
amounts.
If you are paying too much tax this year, the chances are that you will have paid too much tax in previous years as well. If so, you can claim back the tax over paid right back to the 6 April 1998. Tax overpaid before that cannot be reclaimed now. The income limits are a bit lower for those years, but don’t worry about that. If you should not be paying tax this year claim for each of the past six tax years as well, back to 1998/99, and let the Inland Revenue work out if anything is due.
Claiming tax back
So there are three occasions to claim tax back
You should only have paid tax at 10 per cent not 20 per cent
You have a joint account and cannot get the tax paid without tax being deducted
You have paid too much tax in previous tax years back to 1998/99.
Normally a claim for tax back has to be made after the end of the tax year. So if too much tax is being taken from your savings this year, you should wait until after 5 April 2005. But you can claim during the tax year if you are owed more than £50 or if it will cause you hardship to wait.
You claim tax back on a form called R40. And you need up to seven of them – one for each tax year you are claiming for. It is a four page form and comes with 12 pages of notes. But don’t be put off. A lot of the questions are not relevant for most people and can be left blank. You will need to know your income in the years you are claiming for and the amount of interest on your savings. If you are claiming for a joint account then you each have to fill in the form and put half the income credited to the account.
You can get the form R40 from your local bank or building society or by calling the TaxBack helpline. Or you can download the form and the notes from the Inland Revenue website. Print out enough copies and write the tax year you are claiming for and your name and address at the top of each one before you fill them in.
Couples can save more money if one of them pays tax and the other does not – or pays it at a lower rate. The partner who pays tax can give the savings to the partner who does not. That way tax can be avoided – as long as the interest on the savings does not turn the non-taxpayer into a tax payer! But the gift must really be a gift. The other partner has to own the money transferred. Only you know if that would cause problems in your relationship.
Further information
For more information about getting your interest without the tax taken off, or
about claiming tax back, ring the Inland Revenue on 0845 980 0645
IR111 Bank and building society interest. Are you paying tax when you don't need to? And IR 110 Bank and Building Society Interest - A Guide for Savers from Inland Revenue Enquiry Centres or its Orderline 0845 9000 404 or the website.
September 2004
e-mail Paul Lewis on paul@paullewis.co.uk