? Tax rate on savings for a higher rate tax payer ?

PaulMellor

Dear MSE,

Could someone help clarify a point for me. From general reading on this site, it looks as though higher rate tax payers pay 40% on their income and 40% on their savings ? Hence the recommendation by Martin that it makes sense to shuffle savings to your partner (if they are standard rate tax payers).

I am a higher rate tax payer. I asked my bank for the current tax rate imposed on my savings - and here is the reply I received : << Income tax banding is not compliable with interest tax earnings. Any interest earned in your accounts will be taxed at 20%. >>

What does this mean ? Questions are:
1) MSE wrong or bank wrong ?
2) If neither are wrong - am I meant to pay an additional 20% on my savings when I lodge my end of year accounts to Inland Revenue ? (NB: I am self employed).
2) Can I legitimately transfer money to my partner (she is not my wife yet ...few months before the axe falls officially !).

Many thanks

LittleVoice

It means the bank can't operate PAYE. They either pay interest without any deduction of tax or deduct 20%.
If you earn sufficient to be liable to have your intererest taxed at 40%, the extra 20% will be collected from from you by HMRC as you will have declared it on your tax return.
You can transfer money to whomsoever you want - but it is their money then, not yours. And any interest paid out to you is, of course, down to your account.

dwsjarcmcd

You have your answer with your 2nd question. Interest is taxed at basic rate tax and you declare the interest earned on your tax assessment. The revenue usually decuct this from your tax code.

As for transferring money to your partner, then yes you can, it's your money! A few theoretic pitfalls
1. You are giving her the money....she can keep it!
2. It could affect her tax position
3. If it was a fortune, then it could affect Inheritance Tax.

I said they were theoretical!!

David

jem16

PaulMellor wrote: »

Dear MSE,

Could someone help clarify a point for me. From general reading on this site, it looks as though higher rate tax payers pay 40% on their income and 40% on their savings ? Hence the recommendation by Martin that it makes sense to shuffle savings to your partner (if they are standard rate tax payers).

I am a higher rate tax payer. I asked my bank for the current tax rate imposed on my savings - and here is the reply I received : << Income tax banding is not compliable with interest tax earnings. Any interest earned in your accounts will be taxed at 20%. >>

What does this mean ? Questions are:
1) MSE wrong or bank wrong ?

Neither is wrong.

2) If neither are wrong - am I meant to pay an additional 20% on my savings when I lodge my end of year accounts to Inland Revenue ? (NB: I am self employed).

Yes that is where you pay the extra 20%.

2) Can I legitimately transfer money to my partner (she is not my wife yet ...few months before the axe falls officially !).

Many thanks

You can put all the savings in your partner's name but remember the money would then become hers.

Remember though it's interest earned over the whole year - transferring it for a few months won't take away all the interest.

dunstonh

From general reading on this site, it looks as though higher rate tax payers pay 40% on their income and 40% on their savings ?

For unwrapped savings that is correct.

1) MSE wrong or bank wrong ?

Neither. Tax is taken at 20% at source and you have to pay the other 20% under self assessment whcih you said in point 2

2) Can I legitimately transfer money to my partner (she is not my wife yet ...few months before the axe falls officially !).

Yes. Although it becomes her money so she can do with it as she wishes.

You can also use tax efficient investments and savings options as well. NS&I certificates, £7200 each ISA allowances, Investment bonds (onshore of offshore depending on circumstances), low/no yield unit trusts or investment trusts etc.

jamesd

You could also look at investments outside tax wrappers like BlackRock UK Absolute Alpha and Cru Investment Portfolio. They pay in capital growth so you could use your CGT allowance to reduce tax if it's otherwise unused. And even if not, 18% CGT is cheaper than 40% income tax. Either seems likely to beat savings accounts without undue risk, but they aren't so suitable for short terms, particularly the Cru fund.

llama_thumper

OK - and what if I am not self employed and do not complete a tax return? ie I get taxed through PAYE - do I need to notify the bank that I am a higher tax rate payer, or will the savings be deducted at the higher rate automatically?

I phoned my tax office who said this would be done automatically - unfortunately I don't have this in writing... any ideas anyone?

i'm able to find loads of information on how to get interest on savings tax free (ie if i am non-resident, etc), but not on how to handle the change to being a higher rate tax payer. any hints appreciated.

MarkyMarkD

You need to tell HMRC each tax year how much interest income you have received. They should ask you to do so if you are a higher rate tax payer, even if you don't get a full tax return. Even if they don't ask, you should still tell them.

00ec25

MarkyMarkD wrote: »

You need to tell HMRC each tax year how much interest income you have received. They should ask you to do so if you are a higher rate tax payer, even if you don't get a full tax return. Even if they don't ask, you should still tell them.

HMRC do not ask you, they stopped that sometime ago. The onus is now on YOU to tell THEM.
This applies whether you are employed (PAYE) or self employed. If you have simple affairs eg, a PAYE salary and some interest then they will respond by telling you to either fill out a self assessment tax return or if lucky simply send them a statement of income and they will adjust your tax code.

timydog

MarkyMarkD wrote: »

You need to tell HMRC each tax year how much interest income you have received. They should ask you to do so if you are a higher rate tax payer, even if you don't get a full tax return. Even if they don't ask, you should still tell them.

See my thread i started, i only started one, but cannot post the link, newbie?


But they do not ask, they probably do not know, so if you do not tell them then, god know's, my friend has gone 15 years until now he has told them, crazy system?:rotfl:

ScarletBea

llama_thumper wrote: »

OK - and what if I am not self employed and do not complete a tax return? ie I get taxed through PAYE - do I need to notify the bank that I am a higher tax rate payer, or will the savings be deducted at the higher rate automatically?

I phoned my tax office who said this would be done automatically - unfortunately I don't have this in writing... any ideas anyone?

i'm able to find loads of information on how to get interest on savings tax free (ie if i am non-resident, etc), but not on how to handle the change to being a higher rate tax payer. any hints appreciated.

Hi, I'm literally handling this at the moment.
2008/09 was my first year as high-rate tax payer - I called the HRMC office on monday who said that since my savings interest was less than £10,000 (can you imagine having that in interest!!!!), the easiest way is to adjust my PAYE code.
So today I'm going to call them with the exact figures (my net and gross interest, and how much extra I need to pay), and they will deduct that from the taxfree allowance for the rest of this year.
Quite easy.

I did ask if I couldn't just pay it all in one go, but they said that would mean filling in a Self Assessment and they kinda discouraged that...