New research from the pressure group, Save Our Savers, has revealed that up to three million people are over paying tax on their savings accounts.
A Freedom of Information request by Save Our Savers to HMRC, has shown that during the 2009/10 tax year 3.5 million people were eligible to have paid tax on their savings at a rate of 10% rather than 20%, however, only 500,000 applied for the tax refund they were due via the self assessment system.
The scale of the problem is hard to quantify, however a parliamentary report in 2010 estimated that 2.4 million pensioners overpaid tax to the tune of £200 million.
Tax on savings interest
Save Our Savers argue that the way in which interest from savings accounts is taxed is too complex and unfair, causing millions of people to over pay.
Savers, who are not eligible to pay tax because their income is below the Personal Allowance, can apply for interest on their savings accounts to be paid gross, that is, without the deduction of tax.
However, many savers do not complete this form, leading to significant amounts of overpaid tax.
Savers who then have less than £2,560 in interest per year above the Personal Allowance are liable for tax at a rate of 10%, instead of the 20% which would be due on other income, for example a pension, above the Personal Allowance. However, 20% is deducted by the bank or building society, leaving the saver to claim the difference back via a self assessment form or a R40 form.
The system is undoubtedly complex and it is clear that the majority of savers are not claiming back the tax refund due to them having had 20% deducted from their savings account despite only being liable for 10%.
Save Our Savers believe this is unfair, because the complexity of the system means that millions of people never reclaim the tax refunds they are due, but also because higher rate tax payers have the same 20% deducted but are given time to pay the additional 20% they owe.
Simon Rose of Save Our Savers said: “These aren’t just theoretical examples. We know of one saver who, despite only owing £93 in tax had £1,265 deducted. She was thus deprived of £1,172 in income and had to wait until the end of the tax year to reclaim it, a considerable hardship for someone on such a low income.”
Inflation erdoing savings
Save Our Savers also point out that tax is being paid on savings despite the fact that inflation is eroding the real value of many people’s capital.
Mr Rose said: “The way in which savings are taxed needs to change. They system is inequitable and unfair. The way in which lower rates, designed to help those on lower incomes, operate is poorly understood, bureaucratic and ineffective. Better-off savers are given generous credit terms to pay the tax they owe on their savings, whilst pensioners and others on low incomes have to overpay immediately, then have to fill out various forms to reclaim their own money.”
Reducing tax on savings
Financial experts suggest that there are a number of things savers can do to reduce the tax they pay on their savings.
Firstly non tax payers should ensure that an R85 form is completed to have the interest paid gross.
Secondly, anyone who has 20% tax deducted, but is actually only liable for tax at a rate of 10%, should make sure they reclaim the difference either through a self assessment form or an R40 form.
Thirdly taxpaying savers should make sure they use up their Cash ISA allowance, parents should also use their children’s Junior Cash ISA allowance when it is available.
Finally, when a husband and wife, or indeed a couple, have savings, they should be held in the name of the person paying the lowest rate of tax.