Please Explain Interest Rates!!!!

stoneroses89

Hello,
Ive never really been too sure what interest rates actually mean,i.e if AER and Net figures and how this links in with tax that you pay.
e.g if you saved £100000 for a year at 6% AER would yo recieve £6000???
and how much do they tax you on that???and does everyone pay the same Tax on there savings???
Help would be appreciated.

YorkshireBoy

You always earn interest at the gross p.a. rate, and that's the rate you're taxed on (if you pay tax...some people don't). Multiply the quoted gross p.a. rate by 0.8 and you should have the quoted 'net' figure.

On (clean, ie no bonus/rate change mid-term complications) accounts paying yearly interest, gross p.a. = AER.

On monthly interest paying accounts (again assuming they're clean) the gross p.a. rate quoted will be less than the AER to allow for compounding, ie interest on interest.

All tax payers will have interest deducted at source at the rate of 20%. Higher rate tax payers will declare their interest paid in each tax year and HMRC will then claim another 20% (40% in total)...via the tax coding system.

There's a 10% rate of savings interest tax as well, but I'll leave someone else to explain that since I don't know how it operates (but think it's rebated via the tax coding system also).

To answer your specific question, yes you will earn £6K in your scenario.

stoneroses89

thanks for answering,i have savings and reckon i might be paying too much on the interest because what im earning is nowhere near what i think it should be in relation to what has just been explained to me

opinions4u

stoneroses89 wrote: »

thanks for answering,i have savings and reckon i might be paying too much on the interest because what im earning is nowhere near what i think it should be in relation to what has just been explained to me

If your total earnings for the current tax year are £6,035 or less (recently changed to this - please confirm if I've quoted the figure incorrectly folks), you can make an R85 declaration to your savings provider and they will be able to pay you interest without deducting tax.

If you earn over £6,035, start looking at ISASs for the first £3,600 and top up each tax year. This way you can have over £10k saved tax free in just over 2 and a half years. If you know you will earn over this amount in the next year or two, investigate ISASs anyway as this will increase your returns once you become a taxpayer.

Hungerdunger

opinions4u wrote: »

If your total earnings for the current tax year are £6,035 or less (recently changed to this - please confirm if I've quoted the figure incorrectly folks), you can make an R85 declaration to your savings provider

I think that should be "total income". Even if you had no earnings, but received income from your savings which exceeded £6,035 you could not use the R85, but would have to wait until the end of the tax year to reclaim some of the tax paid on the first part of your savings, which is taxed at 10%.

cheekykid

Is a normal pension from the state considered as income?

CLAPTON

cheekykid wrote: »

Is a normal pension from the state considered as income?

yes of course but its not taxed at source so it uses up some of your personal allowance