LITRG warns that savers in not-for-profit Credit Unions might need to tell HMRC about untaxed income – the tax position is not the same as interest on more traditional savings accounts.
20/09/2014, by Low Incomes Tax Reform Group, Tax Articles - Income Tax
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Background
In recent times, savers may have turned to not-for-profit Credit Unions as an alternative to mainstream banks and building societies. Some employers are helping employees save for a rainy day by setting up a payroll deduction into a Credit Union savings account. However, savers need to take care as they might need to tell HMRC about untaxed income – the tax position is not the same as interest on more traditional savings accounts.
Savings interest – tax is usually deducted at source
Usually, you do not have to worry too much about tax on savings interest. If your money is held in an Individual Savings Account, it is tax-free; or if it is held in an ordinary savings account, the bank or building society takes 20% tax off of the interest before you get it. This system mainly works well as most people pay tax at the basic rate. Problems only arise if you are:
- a non-taxpayer (and you either have to claim a repayment or have to tell the bank not to take tax off the interest in the first place);
- entitled to the savings rate of 10% (and have to get back some of the tax taken off at 20%); or
- pay tax at a higher rate than 20% (low-income taxpayers need not worry about this).
On the other hand, Credit Unions do not deduct any tax at source – so you may have to tell HMRC about anything you get from your savings with them.
Credit Union ‘dividends’ and interest
There are two types of income that savers might receive from holdings with a Credit Union:
- returns to members by way of a ‘dividend’ (this varies year on year, depending on how well the Credit Union has done); and
- interest on a savings account with the Credit Union (this will be at a particular rate – check the Annual Equivalent Rate (AER))
The Credit Union member or saver will have to pay income tax on both types, unless they are a non-taxpayer. Both types are treated as savings interest for tax purposes, despite the first being called a ‘dividend’.
Credit Unions do not deduct tax from either form of interest before they pay it to the member or saver. This is helpful for non-taxpayers as it means they do not need to claim back tax; but for those who have other income, meaning they are a taxpayer, it could lead to them having to tell HMRC about it and pay some extra tax.
Do you have to pay tax on your Credit Union savings?
The first question is: are you a taxpayer? For most people, this means checking your taxable income against your ‘personal allowance’ for tax – £10,000 per person for the tax year 2014/15 (which ends on 5 April 2015). Some older people can get extra personal allowances.
Please note that some Credit Unions offer cash Individual Savings Accounts and if your savings are in one of these, then any interest/dividends paid out on them will be tax-free as usual.
Non-taxpayers
If all of your taxable income (including any income from the Credit Union) is within the personal allowance, you are a non-taxpayer. So there is no tax to pay on your Credit Union dividends and interest. Equally, there is no refund due as no tax will have been taken from that income.
Savings rate taxpayers
If your income is slightly over the personal allowance, you might have to pay 10% tax on Credit Union returns – that is, tax at the savings rate. The good news is that the savings rate will drop to 0% from 6 April 2015, meaning that in 2015/16 anyone with a total income of less than £15,500 will not pay any tax on their savings.
Beware that some Credit Union fixed term savings plans roll up and credit your interest in one go at the end of the term. For example, in the case of a 36-month plan, all of the interest is counted as income in the year in which the plan matures, which could significantly affect your tax bracket in that tax year – pushing you out of the savings rate, for example.
Basic rate (20%) taxpayers
Being a basic rate taxpayer means that your taxable income is over your personal allowance (but below the rate at which you start paying 40% – £41,865 for 2014/15) and that you do not qualify for the savings rate mentioned above.
In this case, you will have to pay tax on your Credit Union returns at 20%. Because they are taxed as interest, even Credit Union ‘dividends’ don’t get the benefit of the lower 10% tax rate used for other usual types of dividends.
How to pay tax on your Credit Union savings
If the dividends and/or interest you get from your Credit Union savings, when added to any other untaxed income such as rents, come to less than £2,500, you can ask HMRC to take the tax via Pay As You Earn (PAYE) provided you are a PAYE taxpayer. So if you are employed or get pension income, HMRC will change your PAYE ‘Code’ so that they take tax due on your Credit Union savings. Essentially they do this by reducing the amount of your personal allowance and therefore increasing the amount of tax you have to pay.
If HMRC cannot use your PAYE code to collect the tax, for example because you do not have one or because the amount is too large, they may ask you to complete a tax return each year.
In either case, you will need to tell HMRC about the Credit Union savings income. You need to do this by 5 October after the end of the tax year when you first start to get it.
If you already fill in a tax return each year (for instance if you are self-employed), you do not need to tell HMRC about it separately – you can just include it on the relevant return.
Does Credit Union savings income affect tax credits entitlement?
When calculating tax credits, savings income from Credit Unions is added together with pension income, other investment income, property income, foreign income and notional income. If the total of all of those types of income is £300 or less, it is not included in the tax credits income calculation. If the total is over £300, only the amount over £300 is included in the calculation. You ignore any tax taken off or paid on any of these types of income – it is the ‘gross’ amount before tax that is relevant for tax credits.
Note that it is irrelevant for tax credits how much you have saved up (the ‘capital’ deposited) – it is the income from savings that is taken into account.
Does Credit Union savings income affect universal credit entitlement?
Universal credit (UC) will replace tax credits in the next few years as the main form of in-work support from the benefits system.
In contrast to the tax credits situation mentioned above, for UC it is the amount of savings (or ‘capital’) that will be taken into account in calculating the award. The actual income you receive from those savings will be irrelevant.
The maximum capital limit for claiming UC is £16,000 for either a single person or a couple where that capital is held jointly. If capital is above this amount, there is no entitlement to UC. The lower limit is £6,000, so any capital below £6,000 is disregarded.
If you have savings of between £6,000 and £16,000, when calculating your UC award, it will be assumed that you have £4.35 a month of ‘tariff’ income for every £250 you have over the £6,000 threshold. This theoretical income figure will reduce your award by 65% if it exceeds your standard allowance, other elements and work allowances.
Please note there are special rules for people who are moved across from tax credits to UC by HMRC/DWP which may mean you can still claim even if you have savings of more than £16,000.
Conclusion
Credit Union savers may only receive small amounts by way of return (and so are unlikely to have much tax to pay), depending on the amounts deposited. However, if the economy continues to improve, meaning that people are able to save more, and/or if interest rates go up, the returns and tax due could also increase.
If you have savings with a Credit Union, make sure you don’t get caught with an unexpected tax bill.
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