From April 2015, if your total income (things like wages, pension, benefits and savings income) is less than your personal allowance plus £5,000, you will be eligible to register for tax-free savings with your bank or building society.
Non-savings income is always taxed before savings income. So the tax-free £5,000 savings band only applies if you earn less than £15,600 a year, or if some of your savings income falls into the £5,000 band.
If you believe all of your savings income will fall within the £5,000 limit, you can ask your bank or building society to pay your savings interest tax-free by filling in a R85 form, which is available on gov.uk.
If only part of your savings income falls into the £5,000 band, you may be able to get some of the tax back. Complete form R40 available on gov.uk and return it to HMRC if you think this applies to you.
In addition from April 2016, a tax-free allowance will be introduced for the interest that people earn on savings. If you are a basic rate taxpayer and have a total income up to £42,700 a year, you will be eligible for £1,000 tax-free savings allowance.
If you are a higher rate taxpayer and earn between £42,701 and £150,000, you’ll be eligible for a £500 tax-free savings allowance. Those with income in excess of £150,000 a year will be taxed in full on their interest income.
As a result, from April 2016 banks and building societies will pay interest gross and HM Revenue & Customs will look to adjust PAYE coding notices accordingly.
By Jo Nockels
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.