The new tax year and changes to the tax-free allowance – essential checks needed by savers and pensioners - LITRG Press Release
As interest rates continue at an historical low, savers need to count every penny. With this in mind, the LITRG are encouraging low-income savers, often pensioners, to check they are not overpaying unnecessary tax on their interest.
Normally savings income is paid to account holders after basic rate income tax (currently 20%) has been deducted, with the bank or building society passing on the tax to HMRC. There is an exemption for non-taxpayers, who can apply to have their savings income paid to them gross (with no tax deducted) using an ‘R85’ form.
The LITRG is therefore encouraging savers to:
- Review their taxes for the year to 5 April 2013 just ended to check if they might qualify for a tax refund. These might be non-taxpayers whose personal allowances covered all their income, including savings interest, for the year but who did not register R85 forms or who had other types of savings income on which the R85 cannot be used. Alternatively, they might be those with incomes up to £2,710 above their personal allowance, in which case some or all of their savings income could fall within the 10% savings band.
- Review whether to register (using the R85 form) to get their interest paid gross, which is worth doing if their income including interest is below their tax-free personal allowance. More people could be eligible to do so in 2013/14 than in 2012/13 due to the sharp increase in the standard allowance from £8,105 to £9,440. Pensioners should however be vigilant as the increased personal allowances by reference to age have been frozen at their 2012/13 levels and entitlement to them restricted to those born before 6 April 1948. Some might need to de-register R85s that have hitherto been in place.
Earlier this year, LITRG pointed out that people on low incomes are losing out because they are not able to get the forms and information they need to receive bank and building society interest without tax taken off. The group undertook some research comprising visits to bank and building society branches and websites, which found that fewer than one in ten was able to provide account holders with all the information they need.
LITRG’s Chairman, Anthony Thomas, said:
“It is good to note that HMRC have already updated the R85 Helpsheet for 2013/14 to reflect the changes in personal allowances. It is though quite disappointing that they have kept the Helpsheet separate from the R85 form itself. This adds to the risk that savers will not receive complete information on how and when they can apply for interest to be paid without deduction of tax on their savings.
“It is possible to reclaim overpaid tax after the end of the tax year, but it is certainly more cost-effective for the individuals and HMRC if the R85 procedure is used. Due to a clear lack of awareness, many individuals lose out completely as they do not make a repayment claim in time.
“Savers need to review their taxes for the tax year just gone (year ending 5 April 2013) and for the year ahead, with a particular eye on how the changes in personal allowances between the two years affect them. For those on low incomes, even small amounts of overpaid tax can be significant, so reclaims should be made where possible.”
- Personal allowances for the year to 5 April 2013 were: £8,105 for those aged up to 64 inclusive; £10,500 for those aged 65-74; and £10,660 for those aged 75 and over. The higher allowances for those aged 65 and over are reduced for those with incomes over £25,400. Further allowances such as the blind person’s allowance or married couples allowance might also be claimed, depending on eligibility. If tax has been overpaid on savings income, form R40 will need to be completed to reclaim it from HMRC. A claim must be made within four years of the end of the tax year in question. See here for more details.
- For 2013/14, there have been significant changes to personal allowances. The standard allowance is £9,440 and the increased allowances by reference to age are now restricted to those born before 6 April 1948, an allowance of £10,500 being available to those born between 6 April 1938 and 5 April 1948, and £10,660 for those born before 6 April 1938. Again these higher allowances are restricted for those with incomes over £26,100. The policy to freeze the £10,500 and £10,660 allowances at their 2012/13 level means that some pensioners might be drawn into tax in 2013/14 if their income otherwise increases, for example pensions increasing by annual uprating for inflation.
- Savers can consider taking advantage of Individual Savings Account limits each tax year to shelter interest income from income tax altogether.
- The latest versions of form R85 and its accompanying Helpsheet can be found on the HMRC website.
- LITRG undertook a mystery shopping exercise during 2012 to assess the performance of banks and building societies in publicising and operating the R85 procedure; this involved visits to branches and websites. The aim of each visit was to obtain up-to-date versions of both form R85 and the accompanying Helpsheet. An up-to-date Helpsheet is essential as otherwise the customer cannot calculate accurately whether or not they are a taxpayer. Altogether, the group found that in only five attempts out of 52 branch and online mystery shops did they receive the form and the up-to-date Helpsheet. The LITRG report can be read in full here.
- The government’s response to the Office of Tax Simplification’s Final Report on Pensioner Taxation said that HMRC will continue to review the format of the R85 form, but have not given a clear commitment to bringing the form and Helpsheet together. The response can be found here.
Contact: Robin Williamson (please use form at http://www.litrg.org.uk/ContactUs)