For 2015/16 it is possible to enjoy tax-free savings income of up to £5,000 on top of your personal allowance, making it possible to receive tax-free savings income of £15,600 in additional to that held in tax-free wrappers, such as ISAs. This is because savings income which falls within the £5,000 savings rate band is for 2015/16 taxed at a rate of 0%.
However, the savings rate band is not available to everyone. The 0% savings rate only applies if non-dividend savings income falls within the £5,000 savings rate band after taking account of all non-savings income and available personal allowance. This means that if taxable non-savings income (i.e. after deduction of personal allowances) exceeds £5,000, the 0% savings rate is not available.
If you have savings income that qualifies for the savings rate and that income has suffered a tax deduction at source of 20% (for example bank interest paid net), you can reclaim the tax deducted on form R40. You can download the form via the following link:
https://www.gov.uk/government/publications/income-tax-claim-for-repayment-of-tax-deducted-from-savings-and-investments-r40.
Example:
Simon receives a salary of £11,000 and bank interest of £2,000 (net). The interest has suffered deduction of tax at the basic rate of 20%.
Simon’s gross savings income is £2,500 (£2,000 x 100/80).
His salary of £11,000 exceeds his personal allowance for 2015/16 of £10,600 by £400. He therefore has taxable non-savings income of £400, which eats into the savings rate band of £5,000, thereby reducing it to £4,600.
As the available savings rate band (£4,600) exceeds his gross savings income (£2,500) for 2015/16, his savings income benefits from the 0% rate. Consequently, it is tax-free and Simon can reclaim the 20% tax deducted at source (£500) back from HMRC by completing form R40.
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