Income received from bank or building society accounts, government treasury stocks (gilts) or corporate bonds is treated differently to dividend income.
The interest is paid to you with a 20% tax credit. In other words, 20% has already been deducted.
Example
| Interest received | £80.00 |
| Tax credit | £20.00 |
| Gross taxable amount | £100.00 |
Depending on your tax bracket you may be able to reclaim some or all of the 20% tax credit, you may have to pay additional tax, or you may have to do nothing at all.
| Earnings | General Income | Interest Income |
|---|---|---|
| £1- £2,320 | 10% | 10% |
| £2,321- £36,000 | 20% | 20% |
| Over £36,000 | 40% | 40% |
If your gross income, after your personal allowance, is in the £1 - £2,320, you will be able to reclaim half of the tax credit. (20% paid less 10% due).
If your gross income puts you in the next bracket (<£36,000) the tax credit of 20% matches your liability so you can't reclaim any money but neither are you liable to pay additional tax.
If your gross income puts you in the higher rate bracket, you will have to pay an additional 20% to bring total tax paid to the 40% level.
Note that in each case the percentages apply to the gross interest, not to the net interest you actually received.
If your income is low enough to make you eligible for a tax refund, you are entitled to ask your bank or building society to pay the interest gross (i.e. without 20% deducted). This is advantageous because you don't have to go through the palaver of reclaiming the money.
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