Tax and allowances for older people Tax on additional income
Non-taxpayers can receive tax free interest on savings
If you are a taxpayer, 20% tax will be deducted from your savings interest before you get it. If you are a higher-rate taxpayer, you'll still have a further 20% tax to pay.
Non-taxpayers can receive tax free interest on savings, rather than having tax deducted automatically and then claiming this back.
To receive the interest you earn on saving accounts with banks and building societies free of tax, you need to complete form R85 (available from your bank or building society).
You will need to work out whether you are a non-taxpayer by completing the helpsheet that goes with the R85. This depends upon your total income and the allowances (personal, blind person’s, age-related, and married couple’s) that you are entitled to.
The 10% (savings income) tax band
If you have very little or no other income apart from interest on your savings, your savings income may be taxed at only 10%, rather than the normal 20% basic rate. This means you should claim back half of the tax deducted at source using form R40.
Tax on your savings income is only payable at the lower 10% rate, if your savings income, plus all your other income (pension, earnings etc), falls into the starting rate tax band of £2,560 (2011-2012). This means you will not be able to claim the 10% rate on your savings if your other income is too high.
Joint accounts
Liabilities are different where joint accounts are concerned
Liabilities are different where joint accounts are concerned.
If you have a joint account with your partner and one of you doesn't pay tax, you should ask your bank or building society if it can pay part of the interest gross (by completing form R85 for the non-taxpayer).
Not all banks and building societies will do this, so you may have to reclaim overpaid tax by using form R40.
Of course, if neither of you pay tax, you can both register an R85 on the joint account to have all the interest paid gross.
Care insurance
A payout from a lifetime care insurance policy is normally tax-free, as long as you took the policy out before you needed care.
Payouts from an ‘immediate needs annuity’ (bought with a lump sum when you already need care) are tax-free if they are paid direct to the care provider.
Equity release
If you take out an equity release product (either a lifetime mortgage or a home reversion scheme), you don't have to pay any tax on any lump sums released.
If you drawdown smaller amounts on a regular basis, this isn't treated as income and won't attract tax either.
However, if you invest the money you release – even if you just put this in a bank account – you'll pay tax on any interest the money generates. If you buy an annuity with the lump sum, you'll pay tax as for purchased life annuities.
Insurance bonds
Income and gains received by UK based life insurance investments are taxed as income at 20%, even if you are a non-taxpayer.
If you are a higher-rate taxpayer, you'll pay an extra 20% income tax on any profit the insurance bond makes when you cash it in or it matures.
Draw an income
You can draw a limited amount (5% of the amount invested) from insurance bonds each year without it affecting your tax at the time. However, any tax due is simply deferred until the year in which the policy is cashed in or pays out.
If you make any withdrawals above this limit, and when you finally cash the bond in, any gain over the amount invested counts as income and can reduce your higher age-related personal allowance. That's why investment bonds are often unsuitable for people over age 65.
Capital gains tax
The post-2010 rules for capital gains tax (CGT) mean that most people, particularly higher-rate taxpayers, will pay more tax on a life insurance bond than, say, a unit trust.
When you cash in a unit trust, it can potentially be liable for capital gains tax. However gains often fall within the annual exemption for CGT (£10,600 in the 2011-2012 tax year), in which case no tax may be due.
Even if CGT is due, it will be at the uniform rate of 18%, compared with 40% income tax paid by a higher-rate taxpayer on an investment bond.
- For any tax query, call our experts on the Which? Money Helpline
- Writing a will? Take a look at our expert guide
- Planning your retirement? Take a look at our guide
