Savings Zero Tax Rate and 5000 Allowance

Published / Last Updated on 03/02/2015

Video explains the zero rate of income tax for savings interest and the savings allowance for the band of £5000 staring April 2015.


“Hello there, a nice little video this. A little bit of a snippet idea and this is to do with the savings tax rate. So, many people are not aware that the starting rate of tax is actually 10% and it goes down to 0% in April 2015. So everybody thinks 20%, 40%, 45% income tax rates, there’s actually a 10% income tax rate and indeed that 10% income tax rate goes down to 0% as an income tax rate with effect from April, the 6th April 2015.

[And] what that starting rate of tax is for: that's to do with just savings interest, savings income only and probably the easiest way to explain this is:

The usual personal allowance, our personal allowance, and shooting this video in February 2015, the personal allowance where we pay no tax is £10,000 and that increases in April 2015 to £10,600. But keeping the numbers nice and round the first £10,000 that you earn or your receive your pension income or whatever it might be: no tax, then roughly the next £32,000 that you earn or have as pension income: that is taxed at basic rate tax then you are into higher rate tax up to £150,000 and then over and above that the additional rate of tax 45%.

So simplistically basic rate tax so no tax £10,000 personal allowance that it’s basic rate tax of 20%, high rate tax of 40% and the additional super rate tax of 45%.

Now, what’s not commonly known is let's say you're a low earner or let’s say you are a pension with low pensions income, then what the government have available is you can earn a certain amount of interest as income within your total income and only pay 10% tax provided you don't go over it. So if I keep the numbers very simple personal allowance to £10,000 and then that starting rate of tax at 10%, the allowance there is £2,880. So if you have a combined income and interest from your savings income maximum up to £12,880 which is £10,000 personal allowance, £2,880 let’s call it a savings allowance, if you have no other income then on that savings element £2,880 then you would pay income tax at a rate of 10%.

Now, with effect from April 2015 those numbers change. The personal allowance goes up both for pensioners and for working people or you know in working age people to £10,600. So that’s the nil tax band that personal allowance £10,600 and now, you know this savings rate, the savings allowance? The tax rate will now be 0% and the allowance is up to £5,000.

So, in simplistic terms here, you can earn provided it is within your personal allowance and then a savings income interest of up to £5,000 and pay no tax so £15 grand a year income tax-free, but like I said: this is only a savings allowance, it’s interest on bank and building society accounts and things like that. So just think about it: if I have a lot of my money on cash deposit, in my savings and I was earning less, up to or less than £5,000 or £5,000 plus the personal allowance of £10,600, if your total combined income is £15,600 or lower no tax.

Now, I did some a numbers and the numbers worked on the basis of lesser you are receiving 3% interest on your savings, I know that’s not great, let’s say you are receiving 3% you could have £166,000 in a bank account paying 3% interest and that would deliver just below £5,000 in saving interest plus your personal allowance £10,600 = no problem. Combine that with let’s say having cash ISAs or using your ISA allowance as normal up to £15,000 or whatever it is now £15,200 and something, with effect the new tax year plus pensioner bonds if you've retired and putting in £10,000 into pension bonds as well or a certain ring to realms here of being able, and national savings premium bonds and things like that you to substantial amounts of savings that you could have and be virtually living tax-free. I accept pensioner bonds there may be some tax charge but there are some quite [large] opportunities here.

But this video simplistically, I just wanted to explain the 0% starting rate of tax with effect April, 6th April 2015. Your first £10,600 is your main personal allowance no tax provided you then have no other income other than savings income e.g. from a bank or building society you can earn interest up to £5,000 a year and no tax. Any questions, as ever, do contact me. Thank you very much for watching.”