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Finance Act 2014

Section 3: the Starting Rate for Savings and the Savings Rate Limit.

Summary

1.This section reduces the income tax starting rate for savings income from 10 per cent to 0 per cent and increases the starting rate limit to £5,000. It also modifies an existing power to make regulations so that regulations may provide that individuals who are not liable to pay tax on their savings income as a result of these changes can register to receive interest payments from their bank or building society without tax being deducted.

Details of the Section

2.Subsections (1) and (2) amend sections 7 and 12(3) of the Income Tax Act 2007 (ITA 2007) to set the starting rate for savings and the starting rate limit for savings respectively for 2015-16 tax year.

3.Subsection (3) provides that the indexation of the starting rate limit for savings, as provided for in section 21 ITA 2007, will not apply for 2015-16.

4.Subsection (4) amends the regulation-making power in section 852 ITA 2007 so that regulations may provide that the duty on deposit-takers and building societies (arising from section 851 ITA 2007) to deduct a sum representing income tax at the basic rate from certain interest payments, does not apply where an eligible individual provides a certificate to the effect that they are unlikely to be liable to pay income tax on their savings income for the year.

Background Note

5.The starting rate for savings can apply to an individual’s taxable savings income (such as interest on bank or building society deposits). The extent to which an individual's savings income is liable to tax at the starting rate for savings, rather than the basic rate of income tax, depends upon the total of their "non-savings" income (including income from employment, profits from self-employment and pensions income). Should an individual’s non-savings income in a tax year exceed the starting rate limit for savings, the starting rate is not available. Where an individual’s non-savings income in a tax year is less than the starting rate limit, their savings income is taxable at the starting rate up to that limit. The starting rate is currently 10 per cent and the starting rate limit for savings for 2013-14 is £2,790 and £2,880 for 2014-15.

6.This change is designed to support savers (particularly low income savers) by, firstly, enabling more people to benefit from the starting rate for savings and, secondly, by reducing this rate to nil. The effect will be to remove the savings income of many lower income savers from liability to tax from 2015-16. It also simplifies processes around the starting rate for savings by enabling eligible savers to register with their bank or building society to receive interest on their savings without tax being deducted, rather than having to reclaim tax they have paid on interest from HM Revenue and Customs.

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Explanatory Notes

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