Non-taxpayers (generally those on a low income which doesn't exceed their personal allowance), can receive tax-free interest on savings. However if you're a taxpayer, either still working or in retirement, your rates of interest will be based on what band of tax you fall into. If you pay the standard rate of tax, 20% will be deducted from your savings interest before you get it. If you're a higher rate taxpayer you'll have an extra 20% to pay, with 'additional rate' taxpayers forking out a further 25% after surpassing the higher rate threshold.
0% Savings Income Band (2015)
Up until now, if you had very little or no other sources of income apart from the interest on your savings you may have been eligible for the lower rate of 10%. As of April 2015 this has been abolished with a new £5,000 (0%) tax free amount introduced. This is in addition to to your personal allowance which is usually £10,600.
To get an accurate figure of how much tax is due, you first deduct your income (non-savings income) from your personal allowance e.g. £10,600 (personal allowance) – £4,000 (pension income) = £6,600. Any remaining allowance (£6,600 in our example) should then be deducted from your savings income. If the remaining number falls under £5,000 then no tax is applicable. If the it tops £5,000 you'll need to pay tax, but only on the amount that falls over the £5,000 allowance, and at a flat rate of 20%.
If your non-savings allowance exceeds your personal allowance, you will need to deduct the excess from the £5,000 allowance for savings allowance. e.g. Your pension pays you £13,000 annually. Deducting this from the personal allowance of £10,600 leaves you negative by -£2,400. You use part of your £5,000 savings allowance to mitigate this, thus £5,000 - £2,400, leaves you with £2,600 of savings allowance to offset against whatever you have stored in savings.
Payments from lifetime care insurance policies should be tax-free, providing you took out the policy before care was needed. Payouts from an 'immediate needs annuity' (normally bought with a lump sum when care is urgently needed), are tax free in instances where they are paid directly to the care provider.
You won't have to pay any tax on lifetime mortgages or home reversion schemes. The same is applicable if you use an equity release scheme to release regular sums of money to provide an income. If you're considering equity release, you should always consult a financial advisor first to see if there is a better solution at hand.
Gains from UK based life insurance investments are taxed as income at a rate of 20% - even if you are a non-taxpayer. If you're a higher rate taxpayer, you'll also be subject to an extra 20% income tax on any profit the bond makes. The way the rules are structured means that most people, particularly higher rate taxpayers, will pay more on a life insurance bond than a unit trust where capital gains is taxed at a rate of 18% or 28%.
If you have a joint account and one of you doesn't pay tax, your bank or building society may agree to pay part of the interest on the gross. Not all institutions offer this though, and as such you may need to claim a refund for overpaid tax using form R40. If neither partner is paying tax you can register using an R85 in order to have all the interest paid gross