A: It is a tax band which applies to savings income that falls within certain limits. The starting rate for savings changed with effect from 6 April 2015 - the band increased to £5,000 and the rate reduced from 10% to 0%.
Q: Does my client qualify for it?
A: If any of your taxable savings income falls within the first £5,000 of the basic rate band, you will not be liable to pay any tax on that taxable savings income, as the starting rate for savings income is 0%.
Q: What’s the limit?
A: The starting rate for savings band is £5,000 for 2020/21. The 0% rate applies to as much of the first £5,000 of taxed income (after deducting the personal allowance and blind person’s allowance, if eligible) that is savings income. Dividend income is taxed aftersavings income and therefore, dividend income will not affect eligibility for the starting rate for savings.
Q: What are the income limits to be entitled to the starting rate?
A: If you have taxable earned and other non-savings, non-dividend income of between £12,500 and £17,500, the savings rate will apply to at least part of your savings income.
Relevance to chargeable event gain on a bond
Q: How can this help my client who has a chargeable event gain on a bond?
A: Chargeable gains on bonds are categorised as 'savings' in the tax calculations, so if a client qualifies for the starting rate for savings, they could potentially make a chargeable gain on an offshore bond to the tune of £17,500 (depending on their total taxable income) without having to pay any tax on the gain at all. This increases by £1,000 to £18,500 once the Personal Savings ‘Allowance’ (PSA) is factored in.
Q: How does it work with an offshore bond?
A: Let’s look at an example:
An individual earning £5,000 can make a chargeable gain on an offshore bond of £12,500 in 2020/21 without having to pay tax:
Tax Year 2020/21
Chargeable gain (offshore)
Savings rate @ 0%
Basic rate @ 20%
Total tax due
This principle applies to clients who have no or minimal earnings, such as those who only have state pension or are in full time education. University students (those over the age of 18) with no earnings whatsoever, can make a chargeable gain of £17,500 on an offshore bond without incurring any tax.
Note also that if the PSA is included, that figure is actually £18,500. From 6 April 2016, the £1,000 PSA was introduced. If however any of the individual’s income is higher rate income, then the allowance will be reduced to £500. If any of the income is additional rate income, then the allowance will be nil.The PSA is more accurately described as a savings nil rate, since the amount of savings income covered by the PSA will still form part of the individual’s total income.