Tax on interest earned

[orangesrule]

Just after a bit of clarification.
Circumstances, higher rate tax payer ('just' fall into this threshold). Saving hard for a house, so will soon have 50k in marcus. Does the whole amount of interest get taxed when I breach the £500/yr threshold or is it interest earned over the £500 that is taxed. Appreciated interest rates are crap, but it may steer marginally more savings into my s&s isa.

[Eric Mc]

The threshold is £1,000 per annum and you only pay tax on the interest over the £1,000. However, you may need to complete a Self Assessment tax return if your interest does exceed the £1,000 as the banks and building societies no longer deduct tax at source the way they used to.

[Stay in Bed Instead]

Eric Mc said:

The threshold is £1,000 per annum and you only pay tax on the interest over the £1,000. However, you may need to complete a Self Assessment tax return if your interest does exceed the £1,000 as the banks and building societies no longer deduct tax at source the way they used to.

Higher rate tax payers only get £500 tax free Eric.

[Stay in Bed Instead]

orangesrule said:

Just after a bit of clarification.
Circumstances, higher rate tax payer ('just' fall into this threshold). Saving hard for a house, so will soon have 50k in marcus. Does the whole amount of interest get taxed when I breach the £500/yr threshold or is it interest earned over the £500 that is taxed. Appreciated interest rates are crap, but it may steer marginally more savings into my s&s isa.

Assuming you are full PAYE, you only pay tax on the interest over £500. An ISA can help negate the tax.

If you own a business are are receiving dividends it has a different effect.

[orangesrule]

Stay in Bed Instead said:

orangesrule said:

Just after a bit of clarification.
Circumstances, higher rate tax payer ('just' fall into this threshold). Saving hard for a house, so will soon have 50k in marcus. Does the whole amount of interest get taxed when I breach the £500/yr threshold or is it interest earned over the £500 that is taxed. Appreciated interest rates are crap, but it may steer marginally more savings into my s&s isa.

Assuming you are full PAYE, you only pay tax on the interest over £500. An ISA can help negate the tax.

If you own a business are are receiving dividends it has a different effect.

I should have clarified, yes, PAYE. Thanks for that! It isnt that clear on the gov website.

I have read as I'm PAYE my tax code is automatically adjusted to cover any tax due from interest, rather than having to do a self assessment.

Very much first world problems.

Edited by orangesrule on Saturday 13th June 09:06

[Mroad]

If you 'just fall into' the higher rate tax threshold then consider adding to your pension arrangement to drop you below the higher rate to gain the extra benefits of the lower band (assuming you're not maxed out on your pension contributions). Unless you need the extra monthly income being above the threshold brings it's pretty much a win win adding to a decent pension for the long term, especially when the market is likely to be down turned for the foreseeable (i.e. buy in the dip).

[orangesrule]

Mroad said:

If you 'just fall into' the higher rate tax threshold then consider adding to your pension arrangement to drop you below the higher rate to gain the extra benefits of the lower band (assuming you're not maxed out on your pension contributions). Unless you need the extra monthly income being above the threshold brings it's pretty much a win win adding to a decent pension for the long term, especially when the market is likely to be down turned for the foreseeable (i.e. buy in the dip).

Yeah, I've currently upped my pension contributions to 10% salary (total 18% with company contributions), plus £150/month share buy. Last year I was £74 into the threshold. However we have lots of work on combined (been doing a lot of overtime) plus with a payrise I'm due, there is no real way I can keep under the upper threshold as I want the cash for the house.

Edited by orangesrule on Saturday 13th June 11:30

[Stay in Bed Instead]

Don't forget that if the interest itself takes you into higher rate tax, the tax free interest allowance is halved.

Total income needs to be under £50,000 to qualify for £1,000 tax free interest.