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Pensioners Could Earn £15,600 Tax Free

Firstly I need to clarify the title of this article – this doesn’t only apply to pensioners but I wanted to highlight them as the most likely to benefit from this change in the tax rules that will start on 6 April 2015. Everyone can benefit, but it is more likely going to be pensioners that will have higher levels of savings income when compared to earned income (which includes pensions).

So, what are the rules that have lead to this change? It is the little known change to how savings income is taxed that have added this extra benefit. To clarify:

Prior to 6 April 2015 if your earnings were below the personal allowance and you also had some savings income, then the initial rate of tax on that savings income was 10% on the first £2,880 of income (2014/15). From the 2015/16 tax year that 10% tax band has been changed to a 0% tax band but not only that, the amount of savings income that should not be taxed (i.e. subject to 0% tax) is rising to £5,000.

So effectively if you have earnings of £10,600 or below, and savings income of £5,000 or less, then this is all tax free.

However, in order to make sure you are not taxed on this income, you will need to fill out the R85 form from your savings provider (or each of them if you have more than one). You can ask the provider to send you this form or you can download one from the HMRC website here, otherwise your savings income will be taxed at source at 20%.

(If your savings income is above £5,000 then you can still claim for the first £5,000 to be tax free but you will need to claim it back with an R40 at the end of the tax year, you will not be able to fill in R85 to get the savings income paid tax free).

This could save you £1,000! (If you have savings income of £5,000 or more and this is being taxed at 20% when 0% is due).

Things do get a little more complicated if your income exceeds the personal allowance (£10,600 for those under 75 for 2015/16) but does not exceed £15,600, in which case part of your income is taxable but your savings income is not if you don’t exceed £15,600 in total. Please leave a comment if you have particular circumstances you are not sure about.

Also, don’t forget to claim back tax for 2014/15 and before

Although these rules come into effect on 6 April 2015, you can also claim back tax that you have paid on savings interest in the past. Previously, if your earned income was less than the personal allowance then you only needed to pay 10% tax on the first £2,880 of savings income. As savings income is taxed as standard (i.e. unless you have filled in an R85 to declare you do not need to pay tax) at 20%, you could be losing out.

You can claim back overpaid savings income tax for the previous 4 tax years, so if you claim before 5 April 2015 you could claim back the following if your savings were taxed at 20% and your earned income was below the personal allowance:

Personal Allowance 10% Savings Band Claim Back
2010/11 £6,745* £2,440 £244
2011/12 £7,475* £2,560 £256
2012/13 £8,105* £2,710 £271
2013/14 £9,440* £2,790 £279
2014/15 £10,000* £2,880 £280**

* note that these are the personal allowance figures for those under 65, allowances may be higher if you are over 65.

** a claim for 2014/15 would need to be done at the end of the tax year

So, if you have been paying the full 20% on your savings then do not delay, claim back the 10% tax! You will need to fill out a form R40 for each of the tax years you wish to claim for and you can find that form here.

Categories: Paying Tax Savings
Marian: Marian worked in pensions/finance for 12 years including gaining the Associateship of the Pensions Management Institute. She has a keen interest in finance, taxation and property and spends time reasearching and writing articles on these topics.
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