Can I reclaim tax?

Tax is a very important presence in life, affecting how much money you get to keep. You will generally have to pay tax on the interest gained in savings, at a rate of 20 per cent for basic-rate taxpayers, and 40 per cent for higher-rate taxpayers. But, you may be able to reclaim some tax and also guard your savings from it, depending on your situation.

Usually, it is paid using the Pay As You Earn (PAYE) system, which is when an employer automatically deducts the set amount that you should pay to the government. They use your tax code to know how much to take from your wages. Self Assessment is the method often used for those who are self-employed or on a high income.

Tax-free interest payments are available from some savings products, which would mean that you actually save money for every £10 of interest gained. When savings accounts are taxed, it is normally done automatically. This means that when £10 is due to be paid out, you will only receive £8, the bank will have paid the tax already.

Those who do not pay tax, or only pay it at 10 per cent, could reclaim half or even all of the money deducted. There is also the option to register to receive ‘gross’ interest, where no tax is deducted during the year.

After 6 April 2015, anyone with a total annual income of less than £15,500 (including interest gained on savings), can receive their interest tax-free. Also, from the same month onwards, you will be able to earn £5,000 from your savings (per annum) above your personal allowance without having to pay tax on it.

It is generally easy to reclaim tax if you think that you have overpaid it on your savings. If you receive an income that is less than the tax threshold, you will need to submit an application to HM Revenue and Customs in order to receive the money you are owed. Also, if you are required to pay more than the basic rate of tax, paying it can be done either through the PAYE system, or self-assessment system. If you need to declare income, or want a tax return, you should contact your tax office.

There are a number of different products which can save you money with regards to tax:

Share-based investments

Anyone who owns shares may receive an income in the form of dividends. An investment fund which is invested in shares could result in you receiving distributions which are taxed just like dividends are taxed.

When a company whose shares you have invested in makes a profit, you will receive dividends, which are a portion of those profits. As the company pays tax on the profits before you receive your dividend, your dividend is treated as having had 10 per cent deducted already for tax before it is paid to you, resulting in you receiving a ‘tax credit’ – worth one-ninth of the amount of the dividend.

For those who do not pay tax, the tax cannot be reclaimed. For those paying a basic rate of tax, no further payment is required. However, for those paying the higher or additional rate of tax, you will be required to pay extra tax. This will be collected either through your self-assessment or PAYE. A tax credit reduces the amount of tax you owe.

Tax efficient investments

There are advantages and disadvantages of stocks and shares ISAs. They are generally only used by those paying the higher or additional rate of tax, but there can be charges for these services. Income from these types of investment funds are not tax-free but they offer favourable tax if held with a stocks and shares ISA. The 10 per cent that has already been deducted from shares cannot be reclaimed. As a result:

  • Anyone paying the basic rate of tax (or less) will have their income taxed exactly the same, irrelevant of whether the shares or funds are held directly or with an ISA.
  • Anyone paying the higher or additional rates of tax will save money if they use an ISA because the shares-based income does not need to be taxed.

If a share is held in an ISA, profit made from the value of that share rising will be tax-free. However, the large annual tax allowance that everyone has can cover the capital gains tax charged on this type of profit. This means if the profit was taxed, in most cases it wouldn’t be taxed anyway.

In instances when investments into your stocks and shares ISA pay interest rather than dividends, the interest is tax free.

Life insurance investments

A life insurance policy is a way to invest in investment funds. The funds are actually owned by the insurance company, who will pay tax on the income. All proceeds that you receive are considered to be income and have already had the basic tax rate deducted, and you cannot reclaim this.

Those who pay the higher or additional rates of tax are required to pay extra tax, but they will not have to pay if the insurance policy is ‘qualifying’ – These are often policies involving you paying regular premiums for a period of ten or more years, but policies involving you paying just once are not ‘qualifying’. For those who pay the basic tax rate (or less), no extra payments are required from you.

There are other investment funds available instead of life-insurance investments, two examples being Open-Ended Investment Companies (OEICs) and unit trusts. For these funds, a certain amount of your proceeds will be counted as income, which are normally taxed in the same way that share-based investments are taxed. Another certain amount of your proceeds could be gains made from the share prices increasing.

If you have these types of investment, instead of life insurance investments, then you could end up paying less tax. This is because there is a large capital gains tax-free allowance, of more than £11,000 per annum, which can mean you do not need to pay as much.