We looked briefly at how tax is collected on savings income in How is my tax collected?
In this section we look at matters in more detail and bring in new topics such as:
Rents or letting income from property
Untaxed interest (interest without tax taken off at source or 'gross' interest)
Gains from life insurance policies or investment bonds
Your rents are not taxed before you get them so HMRC will try to collect the tax by using the PAYE system if you receive a coding notice or by a self-assessment tax return if you are not within PAYE.
Most receipts from UK properties will normally consist of rents from the tenants. But bear in mind that taxable receipts include both money payments (for example, cash) and payments in kind (for example, gardening or cleaning the property in lieu of paying rent).
You can claim certain expenses against the rents you receive and you are then taxed on the net amount. However if you make a loss this can only be offset against rents on other properties you let or can be carried forward to future years to be set against profits from renting. It cannot be offset against any other income such as wages, self employed profits or savings income you may have.
A few of the expenses you can take off your rents are:
- Repairs to property (but not improvements)
- Council Tax and water charges
- Interest payable on a rental business loan
Legal and professional costs (but not those concerned with the purchase or sale of the property)
I have a lodger – what is the 'rent a room' scheme?
You might receive rents from letting out a room in your own home. Where you have a lodger who rents a furnished room in your home and the income you receive each year before deducting any expenses is more than £4,250, you then pay tax on the extra income above this amount. If the rents are below £4250 or - for letting by a couple - £2,125 each, it is tax-free.
Where can I find out more?
You can find more information on renting out property and the Rent a Room scheme on the GOV.UK website. They have sections Renting out your property and Rent a room in your home which are worth having a look at.
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Untaxed interest (interest without tax taken off at source or 'gross' interest
Many pensioners invest in National Savings and Investment products. There are three types of investment:
- Investments where the payments you receive are free of tax e.g. Savings Certificates, Premium Bonds and ISAs.
- Interest on Income Bonds and the Investment Account is taxable but paid to you with no tax taken off.
- Interest on Guaranteed Income Bonds and Guaranteed Growth Bonds have 20% tax taken off before payment to you. You cannot ask for it to be paid to you without tax deducted if you are a non-taxpayer.
Some Local Authorities also pay interest gross and interest on Government stocks called gilts are paid gross, for example Treasury Stock. You may also have War Loan Stock, which is paid with no tax taken off. All of this interest is, however, taxable.
This section does not apply to non-taxpayers who have registered to receive bank or building society interest paid gross using a form R85. We cover interest and non-taxpayers separately.
If you are liable to tax at 20% and you get your income without tax taken off, you will have to pay tax of 20% on the amount you receive for that tax year unless you can use your 10% starting rate for savers tax band of £2,790. Have a look at our separate page on 'which tax rates apply to me?' to see how this rate will work for 2013/14 and whether it will apply to you.
If you will need to pay tax, and all your other income, except your investment income, is taxed before you receive it, you will usually only need to complete a self-assessment tax return if your untaxed income is over £2,500. See our 'Do I need to complete a tax return?' guidance for more information.
If you are liable at the higher rate of tax, 40%, and you get your income without tax taken off, you will have to pay tax of 40% on the amount you receive for that tax year. People on very high incomes (over £100,000 a year) could also lose the benefit of all of their personal allowance and for those with incomes over £150,000 a year, additional rate tax of 45% is payable. This applies to savings income as well as earned income.
Example - Jack - Income bonds - 10% savings rate, 20% and 40% taxpayer
Jack (who was born on 1 April 1947) pays tax at 20% - for 2013/14 his income before allowances apart from his savings is £15,000. He receives interest of £2,300 on his National Savings Income Bonds. This amount is paid with no tax taken off. Jack will have to pay tax at 20% on the interest.
If Jack is a 40% taxpayer the 20% he would need to pay is replaced by 40% instead.
If Jack received interest from National Savings Guaranteed Income Bonds, the interest would be paid to him with 20% tax already taken off and so he will receive £1,840. Jack has already paid 20% tax on the interest so he will have no more tax to pay.
If Jack is instead a 40% taxpayer (income after personal allowances of over £32,010 for 2013/14), he has already paid 20% tax on the interest and will therefore have to pay another 20% tax to bring the total tax paid to 40%.
If Jack's income was £9,560 instead of £15,000 - he could use the remaining £940 (10,500-9,560) of his tax free allowances against his saving income. The balance of the savings income (£1,360) falls within Jack's starting rate for savers tax band of £2,790 and the interest from his Income Bonds is therefore taxed at 10%.
If Jack's income was £9,560 instead of £15,000 but he received National Savings Guaranteed Income Bonds which would be taxed at 20% before he received his interest - he would need to claim a repayment of the extra 10% tax paid and the tax paid on the part of his interest covered by his allowances. Have a look at claiming a repayment to see how to go about this.
We have further guidance for pensioners on when you will need to complete a self-assessment tax return if you have untaxed interest on our 'How does self assessment work?' page.
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When you take out an insurance policy or investment bond, ask your financial adviser or a specialist tax adviser whether any profits you make on the policy (or investment bond) when you cash it in will be taxable. This section covers those policies where the profits (which are often called 'gains') are taxable.
You will make a profit on the policy if the amount you get when you cash it in is more than the amount of the premiums you have paid.
Each year you can withdraw tax free up to 5% of the amount you invested originally. If you do not withdraw your 5% in one year you can carry it forward. However these amounts will be taken into account when you cash in the policy and will make the end profit higher so it's worth remembering this if you don't need to take out the money each year.
When you cash in the policy, any profit you make is free of capital gains tax. You can think of it instead as an 'income tax gain'. This is not the same type of gain that you make when you sell or give away an asset.
If the policy pays out instead on your death, your estate will only be taxed on the difference between the surrender value and the premiums you paid even where the total benefits paid out from the policy are more than the surrender value. This is so that you are only taxed on the profit you make from the investment up to the date of your death and not on any life insurance element (called mortality profit).
If you are a 10% savings rate or 20% basic rate taxpayer the profit that you make on the policy is treated as having already suffered tax at 20% and therefore you have no more tax to pay. It is not possible to get any of this tax back.
If you are a higher rate (40% in 2013/14) or additional rate (45% in 2013/14) taxpayer, there will be extra tax to pay. The profit on the policy is treated as the very top slice of your income and, for higher rate taxpayers, will be taxable at 40% less the 20% tax that you are treated as having already paid. If the profit is likely to be taxable partly at 20% and partly at 40% there is a special relief available. Please contact HMRC if you think this is likely to apply to you.
Example - Tom - 40% taxpayer - gains on insurance policies
Tom is a 40% taxpayer. His taxable income for 2013/14 is £35,000. He also makes two gains on life insurance policies he cashed in during the year. The Profitable Insurance Company has sent certificates to Tom showing what profits he made.
The gains amounted to £10,000 on each policy so Tom will need to pay extra tax of £20,000 @ 20% (40%-20%) or £4,000.
You will need to show the profits on your tax return if you need to complete one and you will receive details of the amount to be returned from your insurance company. If you do not receive a certificate you should contact the company and ask for one.
You should bear in mind that any life insurance profits count as your income when working out what age allowances you may be entitled to, and even though you may be a 20% taxpayer, the loss of allowances means you will effectively be paying more tax. You can see more about age allowance restrictions here.
If you think the profit from cashing in the policy will take your income over £26,100 and you think your income may be lower in the following tax year you may consider waiting until that next tax year to avoid losing any allowances.
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