Tax On Interest Discovery
Discussion
Found something out yesterday that was complete news to me.
We all know (probably) we can earn £1000 in interest a year before we have to do a self assessment and start paying tax. We all know (hopefully) that the personal allowance for income before it's taxed is £12570. But did we all know that the personal allowance isn't actually £12570, it's £17570, made up of £12570 for income and £5K for interest. Plus the £1000 tax free interest allowance.
Ignoring the £1000 interest allowance which is for everyone regardless of income, if you earn £12570 or less, you've can earn a further £5K in interest before paying any tax on it. If you earn £15570, you can earn a further £2K in interest. If you earn £17570 or more, you cannot earn anything in interest (apart from your standard £1000).
If we're looking at an interest rate of say 3%, this means you can earn interest on £200K of savings interest free if you earn £12570 or less.
This is quite useful if you hold cash ISAs, because you're swayed by the interest free benefit. You can usually get a better rate of interest in a non ISA account, and unless you're on or getting close to £200K, which most people aren't, there's no benefit in the ISA, in fact, you're losing money by not taking advantage of a higher rate non ISA account.
Maybe you're all reading this thinking "we all know that, you muppet", in which case, I apologise for wasting everyone's time.
Meanwhile, I'm off to shut my ISA's and move them into non ISA accounts with the best rate possible (I draw down £12570 from my pension a year and that it, plus £4190 tax free portion that doesn't count).
We all know (probably) we can earn £1000 in interest a year before we have to do a self assessment and start paying tax. We all know (hopefully) that the personal allowance for income before it's taxed is £12570. But did we all know that the personal allowance isn't actually £12570, it's £17570, made up of £12570 for income and £5K for interest. Plus the £1000 tax free interest allowance.
Ignoring the £1000 interest allowance which is for everyone regardless of income, if you earn £12570 or less, you've can earn a further £5K in interest before paying any tax on it. If you earn £15570, you can earn a further £2K in interest. If you earn £17570 or more, you cannot earn anything in interest (apart from your standard £1000).
If we're looking at an interest rate of say 3%, this means you can earn interest on £200K of savings interest free if you earn £12570 or less.
This is quite useful if you hold cash ISAs, because you're swayed by the interest free benefit. You can usually get a better rate of interest in a non ISA account, and unless you're on or getting close to £200K, which most people aren't, there's no benefit in the ISA, in fact, you're losing money by not taking advantage of a higher rate non ISA account.
Maybe you're all reading this thinking "we all know that, you muppet", in which case, I apologise for wasting everyone's time.
Meanwhile, I'm off to shut my ISA's and move them into non ISA accounts with the best rate possible (I draw down £12570 from my pension a year and that it, plus £4190 tax free portion that doesn't count).
Forgive me if I'm being thick and missed something, but I don't think this is entirely correct.
The £1,000 allowance is only available to basic rate income tax payers. It reduces to £500 then £0 for the higher rates.
You only need to complete a self assessment if your income from interest is at least £10,000.
If you exceed the threshold for your income tax bracket and you're PAYE then your tax code will be adjusted to collect the tax owed.
According to the GOV website here:
https://www.gov.uk/apply-tax-free-interest-on-savi...
So check out what you're earning in interest before ditching cash ISAs.
The £1,000 allowance is only available to basic rate income tax payers. It reduces to £500 then £0 for the higher rates.
You only need to complete a self assessment if your income from interest is at least £10,000.
If you exceed the threshold for your income tax bracket and you're PAYE then your tax code will be adjusted to collect the tax owed.
According to the GOV website here:
https://www.gov.uk/apply-tax-free-interest-on-savi...
So check out what you're earning in interest before ditching cash ISAs.
"You need to register for Self Assessment if your income from savings and investments is over £10,000"
The gov.uk website is typically vague here...
Surely they mean that if your income from savings and investments is between £1,000 and £9,999 (for a basic rate taxpayer) then they will happily deal with you over the phone, as an alternative to expecting an Self Assessment return from you?
P.S. There is still income tax 'to pay' on savings income above £1,000 pa but as explained above, it may be payable at the 0% rate (doh!) if total taxable income (including this interest) remains below £17,570.
It's a nice little planning area though as you can imagine that it would be possible to craft a 'tax free' income of £22,760 pa* based on a £16,760 pension drawdown (£12,570 within Personal Allowance + £4,190 of TFC) plus up to £6k of 'savings interest' e.g. 3.0% pa on deposit accounts totalling £200k (£5k taxable at 0%, £1k tax free within the allowance).
'* you can of course, produce additional 'tax free' 'income' from savings, ISA portfolios, and/or using CGT allowances so the fortunate few can effectively live 'income tax free' (post 55) with a clear conscious, if that floats their boat.
The gov.uk website is typically vague here...
Surely they mean that if your income from savings and investments is between £1,000 and £9,999 (for a basic rate taxpayer) then they will happily deal with you over the phone, as an alternative to expecting an Self Assessment return from you?
P.S. There is still income tax 'to pay' on savings income above £1,000 pa but as explained above, it may be payable at the 0% rate (doh!) if total taxable income (including this interest) remains below £17,570.
It's a nice little planning area though as you can imagine that it would be possible to craft a 'tax free' income of £22,760 pa* based on a £16,760 pension drawdown (£12,570 within Personal Allowance + £4,190 of TFC) plus up to £6k of 'savings interest' e.g. 3.0% pa on deposit accounts totalling £200k (£5k taxable at 0%, £1k tax free within the allowance).
'* you can of course, produce additional 'tax free' 'income' from savings, ISA portfolios, and/or using CGT allowances so the fortunate few can effectively live 'income tax free' (post 55) with a clear conscious, if that floats their boat.
Edited by Mogul on Thursday 2nd February 13:01
Only really interesting for a small subset of people that have a tiny income and a large amount of cash?
Obviously you haven’t mentioned that if you’re high rate tax payer then it’s £500 quid, or if you’re top rate then there’s no tax free allowance. I doubt there’s many basic rate payers on PH are there
Obviously you haven’t mentioned that if you’re high rate tax payer then it’s £500 quid, or if you’re top rate then there’s no tax free allowance. I doubt there’s many basic rate payers on PH are there
Not sure I understand the 'extra 5000 tax free for savings interest' bit.
So if you earn more than 18k, that 5000 tax free is not available to you? Seems weird.
I just came here about to post about the £1k (£500 for 40% taxpayers) allowance now not going to be enough for people with modest rainy day funds, and how the extra tax would a) be reported and b) impact on the devaluation of any reasonable amount of tax savings. Now instead of my cash account devaluing by approx 2.5% (inflation - 1% interest, if you were lucky) it now devalues by inflation - 2.5% interest - (40% of 2.5%) so more like 10%pa... And people say interest rate rises are good for savers!
So if you earn more than 18k, that 5000 tax free is not available to you? Seems weird.
I just came here about to post about the £1k (£500 for 40% taxpayers) allowance now not going to be enough for people with modest rainy day funds, and how the extra tax would a) be reported and b) impact on the devaluation of any reasonable amount of tax savings. Now instead of my cash account devaluing by approx 2.5% (inflation - 1% interest, if you were lucky) it now devalues by inflation - 2.5% interest - (40% of 2.5%) so more like 10%pa... And people say interest rate rises are good for savers!
Rob - They won't require you to file via SA, but if you are a higher rate tax payer and you have savings interest above £500 for the current tax year, then it is taxable - it's just that you can settle it over the phone / via your tax code and you won't have to do a full SA return if that makes sense?
Agree the £200k in cash savings is an edge case, but by definition, those who retire at 55 with no further employment income need to structure their own pension income from their pension pot / savings pot and the 0% rate on savings income can play a role in a world where Cash ISAs are often marketed as the ideal solution but they don't always deliver tangible benefits if there is headroom within the 0% rate...
Agree the £200k in cash savings is an edge case, but by definition, those who retire at 55 with no further employment income need to structure their own pension income from their pension pot / savings pot and the 0% rate on savings income can play a role in a world where Cash ISAs are often marketed as the ideal solution but they don't always deliver tangible benefits if there is headroom within the 0% rate...
Edited by Mogul on Thursday 2nd February 13:37
Rob_125 said:
I'd imagine very few people would be in the situation where their income from pension would be sub 15k, but they had 200k in the bank?
On the contrary. Many people with large sums in savings and a DC pension pot only draw £12570 in taxable income from their pot, to avoid paying any tax. I haven't quite got £200K in savings but not that far adrift. Why would I take more than £12570 from my pension (plus the tax free £4190)? The pension pot will be ringfenced against IHT if I die before 75, which my savings are not. Better to draw on my savings if needed. Mogul said:
Rob - They won't require you to file via SA, but if you are a higher rate tax payer and you have savings interest above £500 for the current tax year, then it is taxable - it's just that you can settle it over the phone / via your tax code and you won't have to do a full SA return if that makes sense?
How do you report to HMRC that you are likely to earn more that your 500 quid allowance? Or do you have to report it after its been earned then they take it from next years PAYE by changing your tax code? I guess given how volatile cash savings interest rates will be over the next few years, it must be the latter? Can you tell them online, without filling in a SA return?okgo said:
Only really interesting for a small subset of people that have a tiny income and a large amount of cash?
Not really. You only need £33500 paying 3% to exceed your £1K allowance. If you have ISAs for that reason, and you're retired with income below £12570, or a stay at home parent, or whatever, you then have ISAs for no good reason, because you can actually earn £6K of interest tax free. You could be earning more interest tax free in a non ISA account.
Edited by TwigtheWonderkid on Thursday 2nd February 13:43
MickC said:
TwigtheWonderkid said:
MickC said:
Not sure I understand the 'extra 5000 tax free for savings interest' bit.
So if you earn more than 18k, that 5000 tax free is not available to you? Seems weird.
Correct. So if you earn more than 18k, that 5000 tax free is not available to you? Seems weird.
If you call HMRC they may accept your current year estimate (for the current tax year) and adjust your code accordingly, but I suspect that they might ask you to call back once you are in receipt of the actual end of tax year statements that will be issued by each of your savings account providers and let them have the definitive numbers for the year just ended and they will collect whatever is due prospectively...
TwigtheWonderkid said:
Not really. If you're earning over £17570, the don't giveth at all. If you're under that, they giveth more allowance, and don't take it away.
[pedant mode] oh yes they do... [/pedant]HMRC said:
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
Anyway yes you are right if you earn a normal wage they don't even give you the allowance, although reducing it as above would have the same effect. Mogul said:
If you call HMRC they may accept your current year estimate (for the current tax year) and adjust your code accordingly, but I suspect that they might ask you to call back once you are in receipt of the actual end of tax year statements that will be issued by each of your savings account providers and let them have the definitive numbers for the year just ended and they will collect whatever is due prospectively...
I suppose at 3% for 50k savings that's 1500 quid interest, so you'd owe 400 quid tax. 33 quid a month less take home, I'm not sure if I'd rather just give them 400 quid from the savings account there and then. Knowing HMRC they'd want 66 per month because they know you're going to earn a similar amount of interest this year Gassing Station | Finance | Top of Page | What's New | My Stuff