Savings income in more detail

We looked briefly at how tax is collected on saving 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

Gains from life insurance policies or investment bonds

Rents or letting income from property

• 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 rental business 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).
• This also applies 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 £4,250 or - for letting by a couple - £2,125 each, it is tax-free.
• If you need more details on this please contact any tax office.
• With second properties, 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)
  • Decorating
  • Council Tax and water charges
  • Insurance
  • Advertising
  • Interest payable on a rental business loan
  • Legal and professional costs (but not those concerned with the purchase or sale of the property)
    
• You can find more information on renting out property and the Rent a Room scheme on the Directgov website. They have a section Tax on property and rental income which is worth having a look at.

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Untaxed interest

• Many pensioners invest in National Savings and Investment products. There are three types of investments:
  • 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.
• This section does not apply to non-taxpayers who have registered to receive bank or building society interest paid gross using a form R85. If you are a non-taxpayer please have a look here.
• 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 £2,710. Have a look at the link to see how this rate will work for 2012/13 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 only need to complete a self-assessment tax return if your untaxed income is over £2,500.

  However there are now revised HMRC guidelines for completing self- assessment tax returns and they say that if you are a pensioner and the additional liability arising can be collected from your occupational pension then a return would not be required. A simple one-page form - the P810 would need to be completed instead.

• If you are liable at 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.

• Click here to find out when you will need to complete a self-assessment tax return if you have untaxed interest.
• You are taxable at 20% on this income unless your highest rates of tax are either 10% or 40%. You can find more information on tax rates here.
• If your highest rate of tax is the 10% savings rate you will have overpaid tax at the end of the tax year on any untaxed interest included in your coding notice. You will need to reclaim the tax by completing a repayment claim form R40.

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Gains from life insurance policies or investment bonds

• When you take out an insurance policy or investment bond, your financial adviser will let you know 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 if this is easier. 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 40% taxpayer there will be extra tax to pay. The profit on the policy is treated as the very top slice of your income and 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.

• 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.

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