Non-taxpayer query

Bogof_Babe

I wonder if anyone can tell me what happens when a non-taxpayer's annual income from savings interest starts to exceed their personal allowance. I might be in this position soon, as my taxpaying husband is becoming redundant and we want to use his pay-off to the maximum advantage by putting an appropriate sum into my name. Obviously after a short time the accruing interest will take my income above my personal allowance.

Does someone in this situation have to change back to being a taxpayer and then claim their tax back, even when the interest is only a small amount over the personal allowance at first? Also do we have to request tax return forms for both of us. He has been on PAYE and I've never had a tax return since leaving work myself, so this will be new territory for us.

It's doubtful he will take another "proper" job as he is close to retirement age, although he will be looking for casual and perhaps some part time work, which we will obviously keep accounts for so that we can pay our dues.

The immediate problem though is the non-taxpaying situation. Any advice greatly appreciated.

isasmurf

As soon as your taxable income from all sources exceeds your personal allowance you must inform all your banks to cancel the R85 registration. If you income only exceeds your personal allowance by a small amount then you will have to claim back the 10% tax you will have overpaid on your savings income (using a form R40).

You will not have to fill in a Self Assessment form as these are for people with complex tax affairs.

Bogof_Babe

Oh dear, thanks for the info but I just hope the form R40 is not too complicated!

Robert_Sterling_3

I think you just need to tell them:-

How much interest you earned gross
How much tax you paid

They will work out how much you should get back

deemy2004

Bogof_Babe wrote:

Oh dear, thanks for the info but I just hope the form R40 is not too complicated!

You have to list all of the bank accounts, including the account number, and for each account list - Gross income, Tax deducted and net income recieved.

Obviosuly for the inland revenue to determine your total tax liability, you will have to list ALL other gross income including employment, social security benefits, shares dividends, pensions etc...

Bogof_Babe

Only just got back to this thread, been out all day. One further question - my husband's small pension from his last employer is being paid into my account, as it was easier that way to cover the household bills, which I pay anyway. I hope this doesn't count as my own "income", as it is purely a means of getting the family money into the current account of person who actually spends it.

Am I correct in assuming that so long as a couple don't jointly exceed two personal allowances, there is no problem? I know it means we have to keep an eye on trivial things, for instance I've worked out what part of OH's redundancy pay-off I can ask him to "give" me, without pushing my own allowance over the brink.

I was thinking about this situation, and wondering how the tax people view fluctuations due to changes to interest rates. I mean, theoretically someone could be within their personal allowance one day, then out of it the next if the rates go up, then a month later be back in it if the rates go down again.

It's all 'orribly confusing .

charlieboycat

Bogof_Babe wrote:

Only just got back to this thread, been out all day. One further question - my husband's small pension from his last employer is being paid into my account, as it was easier that way to cover the household bills, which I pay anyway. I hope this doesn't count as my own "income", as it is purely a means of getting the family money into the current account of person who actually spends it.

Am I correct in assuming that so long as a couple don't jointly exceed two personal allowances, there is no problem? I know it means we have to keep an eye on trivial things, for instance I've worked out what part of OH's redundancy pay-off I can ask him to "give" me, without pushing my own allowance over the brink.

I was thinking about this situation, and wondering how the tax people view fluctuations due to changes to interest rates. I mean, theoretically someone could be within their personal allowance one day, then out of it the next if the rates go up, then a month later be back in it if the rates go down again.

It's all 'orribly confusing .

Having your husband's pension paid into your a/c doesn't affect its taxability - it remains his income for tax purposes.

You each have your own personal allowance and they are quite separate. You can't add them together and compare with the sum of your incomes. Each of you must compare your own income with your own allowance.

As far as withdrawing the R85 is concerned, you must do this if you think your interest receipts plus any other taxable income (in your husband's case, the pension if nothing else) will exceed your allowance. Conversely, you can file another R85 if it subsequently looks like you won't exceed the limit after all. However, interest income is taxed on the actual receipts (ie. when paid to you, or credited to your account), not on the interest as it accrues. So interest rate fluctuations will only come into play if the next interest payment date is before the end of the tax year (5th April).

If you would otherwise be over your personal allowance, you could go for an annual (not monthly) interest a/c with interest not paid until after 5 April 2006. Conversely, if you might not otherwise use up all your allowance, go for monthly interest (or close the a/c before 5th April to trigger interest "early").

Also - don't forget that as well as a personal (ie. tax free) allowance, you also each also have a 10% band (that is, the first £2,090 of taxable income above the personal allowance is only taxed at 10%). You may want to try and use this up as well.

oceanblue_3

[Am I correct in assuming that so long as a couple don't jointly exceed two personal allowances, there is no problem?]

You are assessed separately, and personal allowances cannot be shared. Those under age 65 have an annual personal allowance of £4,895, and the next £2,090 is taxed at 10%.

Do you expect your [gross] interest to exceed £4,895 before 5 April 2006? If so, then the next £2,090 is taxed only at 10%. Have you maximised your cash ISA's this year?
Also, if your husband reaches age 65 during this tax year, then he is allowed to receive an income of £7,090 before he starts paying tax.

In effect, you could receive an annual total income of nearly £12,000 before any tax is charged.

Hope this helps; please come back with any additional questions!

Bogof_Babe

Wow, you have certainly all got a handle on this, and I am so grateful for your invaluable input.

I think we can proceed from here with the benefit of all your advice, but I am disappointed at just how complicated it all seems to be. But then that's "the system" for you .

I feel I should elaborate on my personal situation, as you've all been so kind and helpful. This isn't something I'd share with just anyone, so I do hope no-one who knows us is reading!

We have, between us, around £330K in savings (including an inheritance from his mother that my husband had a few years ago). We are in the process of moving our money into two ING Direct 4.75% accounts (one each), which anyone with a calculator can work out takes our combined interest earnings over 2x personal allowance.

He doesn't reach age 65 for 5¾ years, so we want to live on our interest basically, which we can do, as we have no mortgage now, and a pretty modest lifestyle. It's what we've always dreamed of, and only the tax complications are standing in the way.

So it seems I will spend the next 5 years juggling our finances and moving money between our online savings accounts, trying to keep just within one of our personal allowances, while not "wasting" any tax-free dosh. It's going to be a full time job!

If 2x personal allowance is not considered enough to live on, then why isn't the personal tax-free allowance higher? What's to be gained by couples having to claim income support etc., except jobs for the number-crunchers?

But I digress.....:rolleyes:

deemy2004

The interest earned on your husbands money in the account its paid into would need to be declared as your income as its not a joint account.

charlieboycat

Bogof_Babe wrote:

So it seems I will spend the next 5 years juggling our finances and moving money between our online savings accounts, trying to keep just within one of our personal allowances, while not "wasting" any tax-free dosh. It's going to be a full time job!:

Err ... not sure I follow this conclusion.

£330k divided equally = £165k each. £165k at 4.75% = £7,800 each. Personal allowance (£4,895) plus 10% band (£2,090) = £6,985. So if you split the money 50/50 then the interest income alone would be such that both you and your husband would fully utilise your personal allowances and your 10% bands, and each of you just creep into the 20% bracket. The ideal scenario (if only I could achieve it!!)

In which case (always assumimg you are (a) happy with ING (there are better rates) and (b) happy to have all your eggs in one basket) you could simply leave the whole £330k in an ING joint account. Not too much juggling involved there .............

However, your husband's pension would result in a small lost tax-opportunity-cost in that he would pay tax on the pension (as additional income in excess of £6,985) at 22%, not 20% (the rate you would pay if you had extra interest income). So to the extent of his pension it would be worth weighting the savings in your favour such that his total income (pension plus interest) doesn't exceed circa £6,985.

I don't know how much the pension amounts to, but (assuming it is less than £6,985) I would have thought it possible to make an initial split of the £330k such that your husband's pension + interest would be circa £7k give or take. Then you could simply forget about it for, say, twelve months - and enjoy the extra time you will now be able to spend with a retired husband.