Don't overtax yourself

You could be one of the millions paying too much to the taxman. But it's easy to stop, says

More than four million people with bank or building society accounts are needlessly paying tax on the interest from their savings, according to a new survey.

The survey, carried out by IFA Promotion, found that 4.5 million non- taxpayers fail to let their bank or building society know that they should be getting their interest gross of tax. By failing to fill in a simple form, they are throwing away 25 per cent (20 per cent after April) of any interest they earn in unnecessary taxes.

Banks and building societies deduct basic-rate income tax from your interest payments. But if you are a non-taxpayer you can register with your bank or building society to receive interest gross of tax, or reclaim tax you have already paid to the Inland Revenue.

The main groups affected are pensioners, young savers and those on a very low income. For single people under 65, income tax starts when annual income reaches pounds 3,525. This rises to pounds 4,630 at 65 and pounds 4,800 at 75. There are about 35 million non-taxpayers in the UK.

Hilary McVitty of Woolwich Building Society says: "Despite all the educational campaigns by the Government and the Inland Revenue, there are still a lot of people out there who are paying tax that they shouldn't be paying."

To get your interest payments tax-free, you need a copy of the Inland Revenue form R85, available from your local bank or building society branch. This form is also available in the Inland Revenue booklet IR110 or from your local tax office.

The form will ask you to sign a declaration that you are unlikely to be liable for income tax in the current tax year. Return it to your local bank or building society branch.

Although you can reclaim tax up to six years after it has first been deducted, it is simpler to register when you open the account.

Inland Revenue spokeswoman Lynn Simpson says: "We do ask the building societies to mention this to people, but, obviously, if people are busy it doesn't always happen."

Once you have registered for gross interest, you remain on the list until you notify the bank or society that your circumstances have changed. For children, who can be registered by a parent or guardian, registration will lapse at age 16. Children who remain non-taxpayers past that age will have to re-register.

There is one quirk concerning children's accounts. This involves parents who put money into an account for an unmarried child under 18. Where the interest on that money before any tax comes to more than pounds 100, that interest is taken to be part of the parents' income and they have to pay tax on it. This is done to prevent parents sheltering their own savings within the child's account.

If you have a joint account, but only one of you is a non-taxpayer, you may still be able to register to receive your share of the interest gross of tax or reclaim the tax later. Where both holders of a joint account are non-taxpayers, both should fill in their own R85.

You can also register on behalf of someone with a mental incapacity, providing you are the spouse, parent, guardian or adult offspring of the account holder.

Once again, you will need form R85. If you have already had tax deducted from your interest payments, and want to claim it back, you will need Inland Revenue form R40, which comes with a set of guidance notes on how to fill it in.

You must complete this two-page form and return it to your local tax office together with a certificate from your building society showing how much interest has been deducted.

Some banks and societies issue these certificates automatically at the end of every tax year, others send them out only on written request.

Registering for gross interest or reclaiming your tax will become slightly less important on 6 April. Changes announced in last year's Budget mean savings will be taxed at only 20 per cent instead of 25 per cent from that date onwards. But who wants to throw away even 20 per cent of the hard-earned interest on their savings?

For more details and for copies of all the forms and booklets above, call the Inland Revenue on 0800 660800.