Zero Rate Band


Zero rate band
From 6 April 2015 the “starting rate” of income tax will be reduced from 10% to zero, and will apply to savings income of up to £5,000. Thus a person with earnings or pension income of less than £10,600 and interest of up to £5,000 will pay no income tax in 2015/16.
This is certainly good news for taxpayers who are living off small pensions and savings. What's better is that HMRC will now allow people with total income of less than £15,600 to register to have their bank/ building society interest paid gross, using form R85. Note that form R85 only covers bank/building society interest, not interest paid by other bodies such as NS&I on savings bonds.
Examples of those who will be eligible to apply for gross interest are given in HMRC's issue briefing for the starting tax rate. There is also a R85 helpsheet and an online calculator to help people decide if they are eligible.
At very end of the R85 helpsheet there is a warning about Gift Aid. To make a valid Gift Aid declaration, which allows the charity to reclaim basic rate tax on the gift, the individual has to confirm they pay enough tax to cover the amount reclaimed by the charity. If the individual is applying for gross interest on form R85, they may not be paying any tax for the tax year concerned, and hence their Gift Aid declaration will be invalid. HMRC can ask the donor to pay tax the charity has reclaimed, based on an invalid Gift Aid donation.
Remember tax credits deemed to be deducted from dividends received are counted as income tax paid for the purpose of Gift Aid donations, but those dividend tax credits can never be reclaimed by the taxpayer.    
Issues briefing: starting tax rate for savings interest