Understanding tax on your savings with No1 CopperPot

At No1 CopperPot Credit Union, we aim to provide clarity around your finances. One topic that sometimes causes uncertainty is tax on savings. This article outlines key considerations and aims to address common queries regarding tax responsibilities, the personal savings allowance, and the difference between dividends on credit union savings and company shares.

Who is responsible for paying tax on savings?

Tax on savings depends on your individual circumstances. As a member of No1 CopperPot, it is your responsibility to ensure that you meet any tax obligations that apply to your savings. Whether or not you need to pay tax on your savings income depends on factors such as your total income and tax band.

Savings income is not classified as tax-free, but many people may not need to pay tax on their savings due to the personal savings allowance (PSA). However, it is important to assess your own financial situation and understand how the PSA applies to you.

What is the personal savings allowance?

The personal savings allowance (PSA) allows individuals to earn a certain amount of interest on their savings without paying tax. The allowance depends on your tax band:

• Basic-rate taxpayers (20%): You may earn up to £1,000 in interest tax-free.
• Higher-rate taxpayers (40%): You may earn up to £500 in interest tax-free.
• Additional-rate taxpayers (45%): The PSA does not apply.

For example, if you’re a basic-rate taxpayer, you would need to save a considerable amount at competitive interest rates before exceeding the £1,000 limit. If your savings interest exceeds the allowance, you’ll need to declare this to HMRC and may be required to pay tax.

Learn more about the PSA and how it applies to you by visiting the HMRC website.

Understanding dividends on credit union savings

Another area of confusion often involves the term “dividends”. At No1 CopperPot, members may receive a dividend on their savings rather than traditional interest.

It is important to distinguish between dividends paid on credit union savings and dividends paid by companies to their shareholders:

• Dividends on savings: These are a share of the credit union’s surplus, distributed to members. They are treated as savings income and fall under the PSA.
• Dividends on company shares: These are payments made to shareholders and are subject to different tax rules.

Recent changes to the tax-free allowance for company dividends (reduced to £1,000 for the 2023/24 tax year and dropping to £500 in the 2024/25 tax year) do not apply to credit union savings. While the same term “dividend” is used, credit union dividends are classified differently for tax purposes.

Key points to remember

1. Your tax responsibilities for savings depend on your personal circumstances, including your income and tax band.
2. Savings income from No1 CopperPot is not tax-free, but the PSA may mean you do not owe tax on your savings, depending on your total savings income.
3. Dividends on savings with No1 CopperPot are distinct from company share dividends and fall under the PSA rather than the reduced company dividend allowance.

Seek professional advice

This article is intended for general guidance only. Tax matters can be complex, and individual circumstances vary. If you are unsure about your tax responsibilities, we recommend consulting a tax professional or visiting the HMRC website for further information. No1 CopperPot Credit Union cannot provide tax advice.