Bank Interest? A change in the way tax is paid!
As of 6 April 2016 the way that tax is paid on bank and building society interest is changing. If you receive less than £1,000 interest per year – or £500 per year if you are a higher rate taxpayer – then there is nothing else to do.
However, if you earn interest in excess of these amounts, then you will get an increased tax bill after the end of the tax year.
This is due to the announcement in the March 2015 Budget that basic rate and higher rate taxpayers will have a “Personal Savings Allowance” of £1,000 and £500 per year respectively.
However, the consequence is that banks will no longer deduct tax at source from your interest. We are advised that the banks and building societies will inform H M Revenue & Customs when an individual receives more than the “Personal Savings Allowance” and that HMRC will then code out the excess amount to collect the tax due. Even if you are confident that HMRC has the resources to do this, it raises questions about the many people who do not have a source of income with a PAYE code!
For the vast majority of our clients, who have to complete an annual tax return, the new rules mean a cashflow difference – at the end of the day an individual will be slightly better off due the tax free allowance - but it may cause an increase to the tax payable in January 2018, which may be a shock (especially when allied to the dividend allowance!):
- If you are a basic rate taxpayer who currently receives £1,200 interest, you have nothing else to do: the tax liability of £300 has been paid before you receive your £1,200
= After 6 April 2016 you will receive £1,500 interest but will have to physically pay over £100 to the taxman
- If you are a higher rate taxpayer who currently receives £1,200 interest, you have a total tax liability of £600, but £300 has been paid before you receive your 1,200
=The extra £300 is paid through your Self Assessment
=After 6 April 2016 you will receive £1,500 interest but will have to physically pay over £400 to the taxman.
As ever, the true effect will depend on your unique circumstances so please contact a member of the robinson+co Tax Team on 01900 603623, 01946 692423 or 019467 25808 for further advice. However, where you are likely to be affected by the new rules, we will be advising you upon completion of your tax return for the year ended 5 April 2016.