Non taxpayers

Updated on 10 May 2016

For tax years up to and including 2015/16, tax was deducted from savings interest at source by banks and building societies. This section looked at how non-taxpayers could prevent this from happening by using form R85.

From April 2016, a new system of tax applies to savings and dividend income meaning most people will have no tax to pay. In addition, savings interest is no longer taxed before you get it by banks and building societies, meaning that form R85 is now obsolete.

This section is retained for information only.

This section is for you if you are a non-taxpayer – for example because your total income from all sources comes to less than your allowances or because you pay tax at the 0% starting rate for savings on your savings income (in 2015/16, the 0% starting rate for savings income applies to savings income over your personal allowance that does not exceed £5,000).

If you have a very low income, you may be entitled to one of the means-tested state benefits, for example, pension credit, housing benefit or council tax reduction. If you pay a little bit of tax, you may be able to treat the tax as a deduction from your income. Check with the provider of your benefit whether or not it has any effect on how much benefit you are entitled to receive.

Can I ever avoid paying income tax at source and receive my income gross?

NOTE: this page applies to tax years up to and including 2015/16 only.

Often, income tax is collected from you at source, for example, tax on earnings is collected through the Pay As You Earn (PAYE) system and tax on bank interest by banks and building societies.

However, the tax deducted at source from your income is only an estimate of what the final tax liability may be. Sometimes, due to the availability of tax allowances and reliefs, you are due a repayment of all or some of this tax collected at source.

If you are a non-taxpayer, that is, your tax allowances are greater than your income or because you benefit from the 0% starting rate for savings income, there is an established procedure whereby you can register to have your bank and building society interest paid without tax deducted. This means you receive your interest gross, and you save the bother of having 20% tax deducted at source only to claim it back later.

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Who is a non-taxpayer?

NOTE: this page applies to tax years up to and including 2015/16 only.

A non-taxpayer is a person whose income is fully covered by available allowances or who pays tax at the 0% starting rate for savings income. Look at the example of Helen to see how you can check whether or not you are a non-taxpayer.

Most children are non-taxpayers, so parents or guardians of children with saving accounts should register for them to receive gross bank or building society interest. Be aware that interest may be treated as being received by the parents for tax purposes – see the HMRC helpsheet on the GOV.UK website for more details.

Some pensioners and others on very low incomes, for example, students may also be non-taxpayers and therefore able to register to receive their bank interest gross.

In addition, you are eligible to register for gross interest if you expect that you will have no tax liability in respect of your savings income because all your savings income falls within the 0% starting rate for savings band – even if you will owe some tax on earned income or dividends. Look at the example of Damian for more on this.

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What do I have to do to register for my bank interest to be paid gross?

NOTE: this page applies to tax years up to and including 2015/16 only.

If you are a non-taxpayer, you can ask for your bank and building society interest to be paid gross, without tax being deducted at source.

You have to fill in a form 85 for each bank building society account where you want your interest to be paid without any tax deducted. You can get the form from your bank or building society or you can download form R85 from GOV.UK. It is not possible to register some accounts and not others.

The accompanying R85 Helpsheet is an important document to get hold of along with form R85 itself. You can find this helpsheet on GOV.UK. This is because it helps you to work out whether or not you are a taxpayer. You can check if you can get your interest tax free by filling in the table in the R85 helpsheet.

Alternatively, you can use the HMRC simple online checker to see whether or not you are a taxpayer. You can find the checker on GOV.UK.

You need to keep a check on your income, and if you think you will have a tax liability on your savings income for any tax year you must contact your bank or building society and let them know. They will then start to take tax off your interest again. It is quite common to forget about this, for example, students may forget when they leave their course and start work.

If you underpay tax because you have incorrectly received gross interest, it will need to be collected either through an adjustment to a PAYE coding or through self-assessment. You may be charged a penalty of up to £3,000 if you certify incorrectly that you are eligible to receive interest gross carelessly or deliberately, or if you do not give notification to your bank or building society that interest should no longer be paid gross.

Remember that, if you cannot register to receive gross interest, because for example, your income is just above your available allowances plus the 0% starting rate for savings income band, you may be due a refund of some of the tax on your interest instead.

You can use the HMRC online checker to see whether or not you are due a refund. You can find the checker on GOV.UK.

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Are there any changes on the horizon for non-taxpayers?

NOTE: this page applies to tax years up to and including 2015/16 only.

In the 2016/17 tax year, a tax-free allowance of £1,000 (or £500 for higher rate taxpayers) will be introduced for the interest that people earn on savings, on top of the 0% starting rate.

According to the Government, this will take 95% of taxpayers out of savings tax altogether. Because of this, from 6 April 2016, banks and building societies will stop automatically taking 20% in income tax from the interest earned on savings.

This will remove the need for those with no tax liability on their savings income to complete form R85 for their savings accounts.

There is more in the Government’s Personal Savings Allowance one page explainer factsheet

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Examples

Helen – non-taxpayer

Helen, born in 1943, has state pension income of £5,000 for 2015/16. She is not married and her only other income is non-taxable pension credit.

   
Income 5,000
Less: personal allowance 10,600
Helen has excess allowances of 5,600


So, Helen is a non-taxpayer for 2015/16.

Damien

In 2015/16 Damian will earn £11,000 a year in his part-time job as a gardener. His tax-free personal allowance is £10,600, so he pays tax on £400 of his wages. He then earns £4,000 a year in savings income (interest earned on his savings). When you add up Damian’s earnings and his savings income it equals less than £15,600, so Damian has no tax to pay on his savings income.

Damian can complete form R85 in respect of his savings income for 2015/16, as he will not have a tax liability on his interest. The fact that he has to pay tax on some of his earned income does not affect his eligibility for the 0% starting rate for savings or the use of form R85.

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Where can I find more information?

NOTE: this page applies to tax years up to and including 2015/16 only.

HMRC guidance for customers on receiving interest gross can be on the GOV.UK website.

You can read more about the problems and inconsistencies in the R85 regime in our report.

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