News, Culture & Society

Am I due a tax bill on my savings after NS&I changes?

With the change to tax on interest mentioned in your article last week I think that I may exceed the £1,000 Personal Savings Allowance.

I have a state pension and two small company pensions which total approximately £11,000, plus I have NS&I Guaranteed Growth Bonds and other savings on which interest may total over £1,000, causing me to potentially incur tax. 

This hasn’t been a concern before as some money was in Isas but as rates have dropped I have moved to other savings accounts.

As my income is below the Personal Tax Allowance of £12,570, will the balance of this be offset against my interest, and do I owe any money?P.T., via email

NS&I’s 2019 changes to its Guaranteed Growth Bonds could leave savers with some head scratching tax calculations

George Nixon, This is Money, replies: Last week, This is Money revealed how hundreds of thousands of customers of National Savings & Investment could potentially end up paying tax on their savings interest due to a 2019 terms and conditions tweak.

The rule change altered how the interest was treated, so rather than being ‘paid’ in each tax year during the lifetime of a Guaranteed Growth Bond, it would all be paid in the year the bond matured.

Savers with larger sums, which likely includes many NS&I customers, could therefore face paying tax on their interest for the first time, as they may exceed the Personal Savings Allowance of £1,000.

The allowance, which drops to £500 for higher rate taxpayers, is widely known.

However, what is less well-known is that savers on lower incomes can actually earn more than £1,000 in tax-free interest.

The idea of being on a low income but having a substantial savings pot may seem counter-intuitive, but it likely encompasses pensioners who have nest eggs and a smaller regular income, many of whom are likely to store money with NS&I, like our reader. 

How does it work?

Canada Life's Neil Jones

Canada Life’s Neil Jones 

This situation, and a bonus tax-free allowance of as much as £5,000, is known as the ‘Starting Rate for Savings’.

Neil Jones, a tax and wealth specialist at financial services giant Canada Life, explains: ‘Savings income benefits from different tax allowances and bands than other types of income with an example being someone with no non-savings or non-dividends income, such as earnings, pension or rental income.

‘They would then be able to receive interest of up to £18,570 this tax year before any tax is payable. This is an extremely valuable benefit. Where an individual has other forms of income the tax benefits are reduced.’

This £18,570 is made up of three parts: the tax-free personal allowance of £12,570, the £1,000 personal savings allowance, and then the starting rate for savings.

The starting rate for savings means that for every £1 earned between £12,570 and £17,570, savers lose £1 of this allowance.

‘Any savings interest that falls in the first up to £5,000 of the basic rate band is taxed at 0 per cent’, Neil added.

The personal savings allowance is then added to this, meaning those who earn £17,570 or more can only get £1,000 in interest tax-free, higher rate taxpayers £500 and additional rate taxpayers nothing.

Are you due tax on your savings? 

This is a fairly complicated three-part calculation, meaning it is far easier to explain with the help of some examples, courtesy of chartered financial planner The Private Office.

Firstly, let’s take your case. You have around £11,000 in pension income, plus just over £1,000 in savings income, which we have put as £1,200, for a total income of £12,200.

We first of all deal with your non-savings income. Because you are already below the personal allowance, we subtract your excess allowance and add that too.

As a result, you have £1,570 of your personal allowance, meaning we don’t actually need to bother with the starting rate for savings at all, because your interest income is below your leftover allowance. In short, you don’t need to worry about the taxman.

Are you due tax on your savings? 
Other income  Savings income Starting rate for savings allowance  Taxable savings  Tax bill 
£11,000 £1,200 £6,570 (inc. leftover Personal Allowance)  N/A  N/A 
£13,000  £6,200  £4,570 (£5,000 – £430) £630 (£6,200 – £5,570) £136 
£13,500  £5,000  £4,070 (£5,000 – £930)  N/A (£5,000 – £5,070)  N/A 
Source: The Private Office 

But for those reading with a retirement income which is a little higher than that, let’s check out some more examples. In each case, the important thing is the order in which you do the calculations.

In this second example, Sarah has £13,000 of pension income and £6,200 in savings income, for a total income of £19,200. Again, we deal with the non-savings income first. Sarah has £430 taxable income: £13,000 minus the personal allowance of £12,570.

As a result, subtract £430 from the £5,000 starting rate for savings, for a subsequent savings nil rate band allowance of £4,570. 

Because Sarah has £6,200 in savings income, she will be taxed on £630 of that, because of the £4,570 plus her personal savings allowance of £1,000.

This excess is taxed at 20 per cent, giving her a tax bill of £126 on her savings.

And then lastly, John has £13,500 from his pension plus another £5,000 in savings, for a total income of £18,500. He has £930 of taxable income, which is £13,500 minus the personal allowance. As a result, his starting rate for savings allowance is reduced to £4,070.

While his £5,000 savings interest exceeds the £4,070 nil rate allowance, the £930 excess is within his £1,000 personal savings allowance. As a result, John has no tax to pay on his savings.

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

Read more at DailyMail.co.uk