Why tax matters
Non-taxpayers don’t need to pay tax on the interest they earn on their savings. Banks and building societies normally deduct tax – 20% for basic rate tax payers and 40% for higher rate payers – from your interest before adding it to your account. So if you are a non-taxpayer you should fill in form R85 – available from banks, building societies and tax offices – then you will receive your interest gross.
TIP: When comparing savings rates, non-taxpayers should look at gross rates of interest as this is the amount they will be entitled to. So if a cash Isa is offering 6% and a standard savings account is offering 7%, the latter will be the best deal for a non-taxpayer. Check our Savings rate converter.
Some investment products, such as insurance company growth and income bonds, are often not suitable for non-taxpayers as they are taxed at source and non-taxpayers cannot reclaim this tax.
If you do pay tax, then it makes sense to find the most tax-effective homes for your savings. Isas are an obvious first choice for taxpayers as any savings or investments within an Isa are free from income tax and capital gains tax. While it is no longer possible to start a new Tessa or Pep, if you already have these they retain their tax benefits. National Savings also offers a range of tax-free products which are worth considering, and there are some tax-free schemes offered by friendly societies.
If you feel you’ve paid tax unnecessarily, speak to your savings or investment provider – they may be able to help you there and then. If you find at the end of the tax year that you’ve had more tax deducted from your savings than you are liable for, claim back this money from the Inland Revenue.
Contact your local tax office for advice about how best to reclaim tax. You need form R40 (SP) (M). Answer the questions and return it. The rest is done for you. The Inland Revenue leaflet IR110 – A Guide For People With Savings will help you. And try the website www.inlandrevenue.gov.uk/taxback.