Don't let the Revenue skim the cream
There’s less than a week to go before the most complex of tax rules begins. It can save some taxpayers up to £232 a year. But most of the people it affects can’t afford an accountant and probably won’t claim it back.
The starting rate of tax of 10p in the pound has been scrapped for most income from 2008/09. But in some limited circumstances it still applies to a narrow band of interest from savings. The rules are tricky.
Imagine your income is in a tall cylindrical glass. Your earnings and pension are the coffee filling up from the bottom. Floating on top of the coffee is the cream of your savings interest. Now draw a line around the glass to indicate your tax allowance. That line is at £5,435 if you are aged under 65, £9,030 if you are aged 65 to 74 and £9,180 if you are aged 75 or more by 5 April 2009. Then draw another line around the glass £2,320 higher than that. Any cream or coffee below the bottom line will be tax free. Any cream or coffee above the top line will be taxed at 20p. But in that middle £2,320 slice the rules are different. If there is any cream in that slice it is taxed at 10p in the pound. Any coffee in that slice is taxed at 20p. Remember the cream always floats on top. So if that section is filled with coffee no cream is there to be taxed at 10p. And if it’s half full of coffee then only cream up to half the band is taxed at 10p. The most cream that can be taxed at 10p is that narrow band.
Taxing that band of savings income at 10p in the pound rather than 20p can save you £232 a year. But here’s the catch. The bank or building society will still deduct tax at 20p in the pound. Don’t blame them – it’s the law. And at the end of the tax year – or earlier if you want – you have to claim back the extra 10p in the pound that has been wrongly taken. You do that by calling the Revenue on 0845 077 6543. If all your income – coffee and cream – is below your tax allowance you can call 0845 980 0645 to get the interest paid without tax deducted.
Even under the old slightly easier rule (coffee in that middle band was also taxed at 10p) up to three million savers have had up to £250 million wrongly taken from their interest. Now the rule is more complex that can only get worse.
More information at www.hmrc.gov.uk/pensioners
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