Interest and older people: commonsense from HMRC

Published on 8 December 2008

For the last week or so HMRC have been running a campaign to remind people who are not taxpayers that they should register with their bank/building society to get their interest paid without tax deduction. Although we would have preferred HMRC to have helped in other ways, the campaign has elicited a new Revenue pragmatism and this is to be welcomed.

We have written many times on this site (the last being in June about the problem of non-taxpayers paying tax when they should be exempt. This arises because banks/building societies take 20% tax off before paying their interest to their savers. Someone who is a non-taxpayer has to claim it back from HMRC or they can register with the bank/building society (form R85) and get it paid without tax deduction.

Of course, instead of making pensioners do all the work, HMRC should match its own data and make automatic repayments – but that is for another article.

Incomprehensible

With the introduction of a generally incomprehensible 10 % savings rate as from 6 April 2008 the decision about whether someone is a taxpayer or not (and at what starting rate) is difficult, especially for older people.

To add a further degree of complication if you and your spouse/civil partner were born before 6 April 1935 and:

  • you are a married man who married before 5 December 2005, or
  • you are the spouse or civil partner with the higher income and you married or formed a civil partnership on or after 5 December 2005

you are entitled to a Married Couple’s Allowance (MCA) which is worth around £650 in tax. How does this integrate with the new 10% savings rate?

The campaign

In the HMRC campaign leaflet, snappily entitled “Like Simon, you may not need to pay tax on your savings interest” they give up the task of trying to explain the impact of the new 10% savings rate, which will give a benefit to very few older pensioners. Instead they translate the £650 of tax into an allowance of £4,472. They also say that everyone who is entitled to the MCA can have the £4,472.

This sanity makes the rules just about understandable, even though strictly it is not available to all.

HMRC say that if your tax-free income limit is greater than your total annual income you do not need to pay tax on your savings interest. They then tell you to complete the form R85 obtainable from them or a bank/building society.

For people entitled to claim exemption in this tax year the income figures provided are:

Born in 1934/35 £13,502 (£9,030 + £4,472) a year or £ 260 a week

Born in 1933/34 or earlier £13,652 (£9,180 + £4,472) a year or £ 262 a week

If you are entitled to the Blind Person’s Allowance you can add a further £1,800 to the annual figure.

Value of the pragmatic approach by HMRC

The figure of £4,472 is correct for certain pensioners born in 1933/34 or earlier depending on their income sources.

This may be £1,200 or so too much relief (£240 a year in tax) for most pensioners of that age, but the new commonsense approach gives it to them. These pensioners may not strictly be entitled to the new savings rate of 10% (which most people think has been abolished).

The new R85 for 2008 confirms the position.

Doris and Jim have been married for 32 years. Jim who is 75 has two pensions, one from the State and the other from his old firm. In total they amount to £12,000 a year. Jim has £30,000 in a bank on deposit at 5% giving him an income of £1,500 from which is deducted £300 in tax. Following the HMRC initiative he fills in an R85 with his bank to have all this interest income paid gross as his total income is less than £13,652.

HMRC have produced a useful calculator which you can find using the link.

A compliment

This pragmatic approach to a difficult problem of explanation is to be applauded. The new savings rate was always an aberration and complicated the situation, which the abolition of the general 10% band was supposed to have simplified.

We just hope that the “compliance branch” of HMRC have been told of this approach as they have been known to pursue individuals who have innocently allowed their bank interest to be paid to them without tax when they were strictly liable.

We also await details of how the Self Assessment and repayment systems have been designed to cope with this new practice at the end of the year. All taxpayers with similar circumstances should be able to get the same treatment regardless of HMRC assessment/collection method.

(08-12-2008)

Contact: John Andrews (Tel: 0844 579 6700 Fax 0844 579 6701)