How do you avoid higher rate tax on savings interest

silentfox

Got a list of questions:

If salary goes slightly into higher rate tax bracket, I presume all savings interest is taxed at the higher rate?

If the salary is transferred into the husband/wife account if they are basic rate tax payers does that avoid the need to pay the higher rate?

Say you are paid monthly and there is a short delay (few days) between the salary entering your account and you moving it into your spouse’s account what about the tiny amount of interest that maybe earned while it is in your account.

When you become a higher rate tax payer is the appropriate amount of tax in respect of your salary taken from your pay automatically or do have to do something?

Does the inland revenue contact you automatically to say that as you are now a higher rate tax payer you need to pay the higher rate on any savings?

Lokolo

They do not contact you. When you will in tax return form you will say I earnt this blah blah and you declare savings. They will then write to you to say you owe this because of tax on interest.

Yes you can trasnfer money to your wifes account and pay less interest. But then she could run away with all the money :cool:

And soon enough, pick your banks well and the transfer will only take hours rather than days.

CLAPTON

you will be liable to 40% tax if your income is over 40,835 for this tax year i.e. 6th april 2008 and 5th april 2009. Income here includes earning, benefits in kind, gross savings income, dividend income but excluded pension payments, ISA interest.

if you go over this then you need to tell the HMRC and fill in a self assessment form after 6th april 2009. usually the HMRC will adjust your tax code to recover the extra tax.


you can reduce your 40% liablity for savings by using your ISA allowance, buy tax free NS&I products, transfer money to your wife and let her save instead

Milarky

Savings interest is subject to a standard 'withholding' tax of 20% for all taxpayers. Moving savings into the name of a spouse/partner who is a basic rate taxpayer generally works to remove any higher rate liability. Where there is a liability however this won't be collectable until you complete a self assessment after the end of the tax year in question. Thereafter (I'm guessing) the IR may 'assume' that you will receive a certain amount of interest each year - equal to the previous year's amount and can adjust your tax code to capture more tax.

eg £5000 is declared for last year - all at 'higher' rate because the indiviudal is a higher rate earner. underpaud tax is 20% [40% - 20% actually paid] or £1000

It is possible therefore for the HMRC to adjust tax code from '5335' to '335' and then 20% tax is paid on an additional £5000.... Any overcollection/undercollection could be carried forward via an adjustment to the tax code above or below what it otherwise would be... ad infinitum

[I'm guessing about this method for collection.. may be quite wrong.. but that is how the HMRC endeavours to collect against previously untaxed savings (i.e. wrongly in 'gross' paying accounts) - by jiggling with the tax code for the following year]

silentfox

Do they send you a tax return or do you tell them (ask for one), just to clarify in respect of the actual salary the amount of tax will be deducted automatically at the higher rate before you receive it and you don’t need to do anything or pay anything at a later date , the tax return is there just to declare any tax owed in addition to that already paid on the salary. Is that right. Sorry if these are really basic questions.

bryanb

Milarky wrote: »

Savings interest is subject to a standard 'withholding' tax of 20% for all taxpayers. ]

Not quite correct, in fact the 10% tax band still exists for savings interest, but it is applied by the bank so you don't need to worry.

whu

they may send you one but if not write to them giving all the info as others have said and they will adjust your tax code for the extra savings tax due etc - if you have a pension remember to claim back the higher tax relief on your contribuions

jem16

bryanb wrote: »

Not quite correct, in fact the 10% tax band still exists for savings interest, but it is applied by the bank so you don't need to worry.

Milarky was correct - this is not.

Banks deduct 20% except in the cases of non-taxpayers who have filled in an R85.

As to the 10% tax band this is only available to those people whose total income does not already take them into the basic rate band - not applicable in this instance. Anybody who does qualify for the 10% band will still have 20% deducted by the bank and will have to claim it back later.

LongTermLurker

bryanb wrote: »

Not quite correct, in fact the 10% tax band still exists for savings interest, but it is applied by the bank so you don't need to worry.

That's only true if your income is very low (I forget the figures)....

edit - here's the link: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015566

If your earned income is less than the starting rate for savings limit (£2,320), your savings income will be taxed at the 10 per cent starting rate up to the limit, rather than the 20 per cent basic rate. The starting rate limit for savings creates an alternative tax band; it is not in addition to the basic rate limit.

But if you earn, say, £15000, all your savings interest is automatically subject to 20% tax.

If you earn £50000, 20% is deducted automatically from your savings interest and you have to declare another 20% through self assessment.

Back to the original question (one of them) I've just been told by the tax office that your earned income, if you go into the 40% bracket, is automatically taxed at the correct rate through PAYE and you only have to fill in a tax return if you have other "untaxed" income such as savings interest or dividends.

ISA contents are invisible to the tax man and don't need to be considered, or mentioned, at all

Mikeyorks

silentfox wrote: »

If the salary is transferred into the husband/wife account if they are basic rate tax payers does that avoid the need to pay the higher rate?

Most of your questions seem to have been answered .... but this bit slipped the net? The answer is 'no'. You can transfer it where you wish - but as you earn the salary, it is that which determines your marginal tax rate - and, thereby, the rate at which your savings (considered to be the top slice of your income) are taxed. The way to mitigate the potential additional tax on your savings interest is fully covered at post #3.

If you are a 40% payer - you are not necessarily required to complete an SA Return for your interest - if your affairs are otherwise 'simple'. There is a P810 form HMRC may use and which is much simpler (and less work for both sides of the equation) to complete / process. And they would only tend to issue that every 2 / 3 years thereafter, in order to check the position.

LongTermLurker

Mikeyorks wrote: »

If you are a 40% payer - you are not necessarily required to complete an SA Return for your interest - if your affairs are otherwise 'simple'. There is a P810 form HMRC may use and which is much simpler (and less work for both sides of the equation) to complete / process. And they would only tend to issue that every 2 / 3 years thereafter, in order to check the position.

Mike, can you define what you mean by "simple"?