40% tax for regular bank savings

coley54321

Hi all,

I am a PAYE who pays 40% tax. I was discussing with a friend who said asked if I fill out a tax return, which I don't, because I figured I was paying 40% PAYE and didn't have any investments etc and the government took all my money at source.

He says I need to pay 40% tax on any interest I recieve on any savings I have? I always thought through my name, National Insurance number etc that the banks who I have these savings accounts with knew I was 40% bracket and my interest was deducted appropriately anyway. But he says I would be paying 20% interest on savings and need to pay a further 20%.

A few questions please...,

1) Is this correct? So lets say I have my current account and a few savings accounts and every time I get a £1.61 net interest payment, I have to sift through them all and declare them somehow?

2) It has never occured to me that this was the case and now I am concerned that the tax bogey man will be coming to get me? Could I get in trouble for this? If so what could happen? Why isn't this made more obvious to people. I bet half the people in the country don't know this?! Especially not for a simple current account / online saver?

3) Because of poor interest rates and 'paperless' statements I pretty much have no record of previous accounts that I had for a few months and then closed - how am I supposed to declare or prove / disprove earnings from interest in a simple way?


Thank you for your time and hopefully your help.

CLAPTON

your friend is correct

banks only deduct tax at 20% but as a higher rate tax payer you need to pay a total of 40%

you need to inform the HMRC after tax year end ....

how much are we talking about here?

best to keep any money in an ISA as these don't have to be declared asa they are tax free

personally I never bother with very small sums e.g. the interest on current a/cs (largely zero now of course)

glider3560

If you ask your bank for a Section 975 certificate for a specific tax year, they will send you a document detailing the gross interest and tax paid. You then put these figures onto a tax return and pay the extra tax directly to HMRC.

coley54321

Thanks Glider. Why don't the banks just use NI details when you set up an account and just deduct 40% straight off the bat? Would save a hell of a lot of paper shuffling for everyone, no!? More uneccessary stress.

I can't even remember some of the accounts I had open, so I guess the best I can do is ask my current bank account for these 975 certificates, and then do a tax return. I bet not that many 40% rate tax payers even know what a 975 is!?!

When exactly does this tax return have to be done by?

Why do they make it so difficult and tiresome?!

Thanks for your replies.

Jake'sGran

How would the bank know that you pay tax at 40%? If you have accounts and don't ask for interest to be paid gross (as I do) they would automatically deduct tax at 20%

You say the government would be taking your money "at source". Not sure what you mean by this as you have mentioned PAYE (pay as you earn) in which case your employer deducts the tax from your income each month (or week, which would be unusual for a person paying the higher rate).

If I were you I would write to the Inland Revenue and explain the situation i.e. that you were not aware that you needed to declare the amount of interest you have earned which has been taxed but possibly not at the correct rate. I have always found them to be quite reasonable especially if the question comes from you and not the other way round.

I am a non taxpayer but sometimes a bank or BS deduct tax from my interest and I just send the Revenue a simple letter giving my income in full and showing any tax deducted which they then refund.

In your circumstances you should use ISAs
for any savings/investments and there would be no tax to pay.

coley54321

Hi Jake thanks for your reply.

I will give them a call then and ask what I need to do. In terms of taking money at source, I just saw regular bank accounts as an area where tax would be covered correctly from the word go. It's not like it's a complex investment. In fact everyone needs a bank account to get paid. Surely the banks know I'm a 40% tax payer by the amount of money coming in each month? It wouldn't be too hard for some legislation to require them to ask that question when setting up the account would it? I would have happily declared my status and recieved less interest.

My point being, that if I've not paid enough tax then so be it, I'll pay the balance they deem I have to. My concern is that I'd consider myself a relatively well educated person and I knew nothing about this - so that must mean lots of other people are completely unaware also. Slipping into the 40% bracket I wasn't advised that I'd need to start collecting 975 certificates from my banks etc. How and why would I magically know that?!

DavidHayton

coley54321 wrote: »

Thanks Glider. Why don't the banks just use NI details when you set up an account and just deduct 40% straight off the bat? Would save a hell of a lot of paper shuffling for everyone, no!? More uneccessary stress.

As the 40% tax threshold shifts downwards over the next three years, more and more folk are going to be dragged into this. And I bet that few of them are going to be writing to their tax offices asking how they can pay the extra tax.

David

lvader

The tax office don't care about very small bank interest payments. It costs them more to process the tax return than they would get in extra tax.

Stompa

coley54321 wrote: »

Surely the banks know I'm a 40% tax payer by the amount of money coming in each month? It wouldn't be too hard for some legislation to require them to ask that question when setting up the account would it?

It's not as simple as that though, the amount you owe will depend on your total income, which may come from a wide variety of sources.

DavidHayton

lvader wrote: »

The tax office don't care about very small bank interest payments. It costs them more to process the tax return than they would get in extra tax.

How small is "very small"? David

CLAPTON

well

for every 1000 you have in savings, lets say you get 2.5% AER in interest so that's £25 per year
the bank deducts 20% tax before paying out so that leaves you with a liability of paying the other 20% i.e. you would owe 20% of 25 = £5

so for every 1,000 in savings you would probably owe about £5 per year at current interesst rates

previously rates were a lot higher so it depends upon how much you you had in saving them and the relevant interest rates

there are many reasons why it wouldn't be practical for banks to deduct 40% but that irrelevant anyway because they don't.