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Can you explain the 0% Starting Rate for Savings and the Personal Savings Allowance?

Starting Rate for Savings (SR) - On 6 April 2015 the 10% starting rate was abolished and replaced by the 0% starting rate.

The 0% band for 2015/16, 2016/17, 2017/18 & 18/19 is £5,000. It is restricted by non- savings taxable income so that none of the band will be available if that income is above their personal allowance (& blind person’s allowance if claimed) plus the £5,000 starting rate.

Personal Savings Allowance (PSA) - On 6 April 2016 the Personal Savings Allowance was introduced, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible.

The two allowances work together and are dependent on your total taxable income.

Interest Paid Gross – From 6 April 2016 savings income will be paid gross (without tax being taken). The R85 was also discontinued.

The easiest way to establish if you qualify is to add up your non savings income, if it is below or within your personal allowance plus £5,000, £16,500 2017/18 then the Starting Rate for Savings will apply.

If this doesn’t cover all of your savings income then apply the Personal Savings Allowance. To determine which rate to use add up all of your taxable income including savings income. If it's £46,350 or less then use £1,000, if between £46,351 and £150,000, use £500. If higher it doesn't apply.

Any savings income over these amounts will be taxable at the appropriate rate and it is your responsibility to inform HMRC. Where possible the amount owed will be collected via your tax code but if this isn’t possible a self-assessment tax return will be required. Scottish Taxpayers use the UK rates and bands for Savings interest.

Gift Aid alert – People who at present, use the tax they pay on savings as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

The following examples for 2018/19 explain the interactions between the SR and the PSA.

Example 1 - Alex is 71 and has non savings income of £11,000. In addition he receives £600 in savings income. His non savings income is below £16,850 and the savings income is within the 0% savings rate of £5,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 2 - If Alex’s non savings income is now £16,450, it is still below the £16,850 threshold and £400 of his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 3 - If Alex’s non savings income plus his saving interest is between £16,851 and £46350, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 4 - If Alex’s non savings income is between £46,351 and £150,000  he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.

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