Act to avoid deductions

TAX-FREE SAVING

Tax May be a necessary evil but, for non-taxpayers particularly, tax on savings is an unnecessary expense. While some savings and investment schemes such as PEPs and Tessas are tax-free, most are not.

Where interest on savings and investments is taxable, this is usually taken automatically. If you are a non-taxpayer you may not be liable for this tax. But to avoid paying or to reclaim this tax, you need to take action.

If you have a bank or building society deposit account the interest on your savings will automatically be taxed at 20 per cent. Non-taxpayers can receive interest gross by filling in the tax exemption form R85 which is available from the bank or building society where you hold your account. You will need to fill in a separate form for each account you hold.

The same rules apply to virtually all bonds available from banks and building societies. Interest is usually taxed at 20 per cent and non-taxpayers will need to fill in form R85 if they are to receive their interest gross. If you have paid tax on your savings in the last six years when you were not liable to pay, you can claim this back. To do this, complete form R40, available from your local tax office. Some banks and building societies also have copies of this form.

Bonds issued by insurance companies and investment houses are taxed differently. Depending on the type of bond, investors may find the interest is automatically taxed at 20 per cent and is not reclaimable even if you are a non-taxpayer. This is usually the case with what are called guaranteed income (or growth) bonds. Always ask the product provider how the bond is taxed before you invest.

Tax on individual shares and unit and investment trusts works differently again. When companies pay out income to their shareholders, this comes in the form of a dividend cheque that is net of basic rate tax and is accompanied by a tax credit voucher that represents the tax paid on their behalf. Non-taxpayers should send the tax credit voucher to their local tax office for a refund. Non-taxpayers who have not reclaimed this tax in the past should speak to their local tax office for advice on an older claim.

So how do you know if you are a non-taxpayer? Basically, if your taxable income is less than your personal allowance, you are probably a non-taxpayer. Taxable income is made up of any earnings, state benefits, pensions, gross dividends and gross interest from savings that you receive, plus any other income. The annual personal allowance is pounds 3,765 for a single person, a married woman and a widow or widower under 65. Married men receiving the married couple's allowance and single parents under 65 have an annual personal allowance of pounds 5,107. People aged 65 and over have higher personal allowances.

To help work out if you are a non-taxpayer and whether you should pay tax on your savings and investments, the Inland Revenue has produced "A Guide For People With Savings", or leaflet IR110. Available from your local tax office, whose address will be in your local phone book under Inland Revenue, it gives details on how non-taxpayers can receive interest gross and reclaim tax already paid.

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