R85 form - income tax question

quatro

I will soon have £30k in heritance money. This will mean that I no longer qualify for pension credit as my savings will be over the £16k limit.

I will therefore have to live off this money and the interest it generates. I will have Disability Living Allowance though - currently I receive £62.50 per week which will help with living costs, and I believe this is exempt from income tax.

I will therefore fill in a R85 thus getting the interest paid gross in the savings account I have opened in readiness for the deposit of the £30k, as the interest will be initially roughly £2k [gross] per annum - and it will be my only 'income'.

However when a house is sold [whenever that will be!] there will be another £50k inherited, which will also be saved, and may generate another £3,200 [gross] per annum bringing my total annual interest to about £5,200.

{To sum up I will eventually have £80k in the bank earning interest of roughly £5,200k gross, and tax free income of Disability Living Allowance of £3k per year - no other income of any sort}

Can someone confirm what I'm doing is correct and 'legal' taxwise ? - as I understand I will be just below my personal tax allowance [being a single person of 60] of £5225. And I don't believe the disability living allowance is counted [?]

And it will be in my interest to keep the money in an account/s whereby I don't earn interest which will take me over my tax allowance [?]

Advice appreciated as I've never been in this position before and tax allowances and earning interest on savings is all new to me!

Thanks !

jem16

quatro wrote: »

Can someone confirm what I'm doing is correct and 'legal' taxwise ? - as I understand I will be just below my personal tax allowance [being a single person of 60] of £5225. And I don't believe the disability living allowance is counted [?]

Yes what you are doing is absolutely correct. You will be entitled to have your interest paid gross.

However with £80k there may be better ways than saving to create income. You would perhaps be best seeing an IFA at that point.

Milarky

quatro wrote: »

{To sum up I will eventually have £80k in the bank earning interest of roughly £5,200k gross, and tax free income of Disability Living Allowance of £3k per year - no other income of any sort}

Can someone confirm what I'm doing is correct and 'legal' taxwise ? - as I understand I will be just below my personal tax allowance [being a single person of 60] of £5225. And I don't believe the disability living allowance is counted [?]

Yes - provided to expect to stay below the limit for personal allowance for the year as a whole. Technically, you switch your accounts back again once your estimate for the tax year [you are in] exceeds the allowance.

And it will be in my interest to keep the money in an account/s whereby I don't earn interest which will take me over my tax allowance [?]

This depends on how much extra income you forsee yourself having to manage - like when you reach state pension age - and squeeze the personal allowance out of the rest. The trouble with 'tax free' accounts are the lousy rates available. Their tangible benefit is only clear to a higher rate taxpayer (£40,000+ a year) - hence part of the reason for the lousy rates!!

Advice appreciated as I've never been in this position before and tax allowances and earning interest on savings is all new to me!

You could, of course, opt for the 'good citizen' approach of simply paying tax at 20% on all savings accounts - then put in an R40 refund claim in April/May the next year. Remember too that there is (currently) a 10% band just above the allowance for non-waged/low waged/low pension people with savings.

bryanb

If you're "no longer entitled" to pension credit this suggests you are receiving state pension (taxable)

quatro

I am currently on incapacity benefit and will go on pensions credit [not state pension as I have not paid enough contributions due to illness] when I reach 60 in the very near future.
However the inheritance will come through just before then so I will not be claiming any pension credit or incapacity when it does.

jennifernil

Do you have an ISA? If not I suggest you look for the best paying fixed rate one and get this years allowance into that quickly.

If you have enough savings left to tie some up for a while, then I would set some aside into a fixed rate account, you can get at least 6.5% on a 1 year fix at the moment. As rates are bound to fall now it is a good idea to go for some fixed rates.

The rest I would put into the best paying instant access account around.

If any pensions etc you get are small, then even if you go over your personal allowance (is it not about 6035 now?) when interest is added, you will only pay 10% on the first couple of thousand or so, and any income, even taxed, is better than none.

If you are under your personal allowance at the moment, fill in the R85s, then if you go over you can withdraw them and reclaim any excess tax that gets deducted.

baby_boomer

quatro wrote: »

Can someone confirm what I'm doing is correct and 'legal' taxwise ? - as I understand I will be just below my personal tax allowance [being a single person of 60] of £5225.

The allowance is actually over £6,000 this year - after changes made to put right the 10% tax fiasco.

Some organisations are still giving out R85 help forms with the old, lower, figure, however .

savetilibleed

quatro wrote: »

I am currently on incapacity benefit and will go on pensions credit [not state pension as I have not paid enough contributions due to illness] when I reach 60 in the very near future.
However the inheritance will come through just before then so I will not be claiming any pension credit or incapacity when it does.

If you are getting Incapacity Benefit, credits are being paid in towards your basic state pension. You can get a pension forecast if you haven't already. You will be in a better position to judge if you can claim gross interest then.

trashcan_2

When you get your £50k inheritance would this not take you over the £6000 threshold for getting your saving paid gross.
£3200 from income capacity and the interest on £80k would take you over, would it not? would this come into effect as soon as you received the £50k or at the end of the tax year, and would you have to inform them straight away or at the end of the tax year?

savetilibleed

trashcan wrote: »

When you get your £50k inheritance would this not take you over the £6000 threshold for getting your saving paid gross.
£3200 from income capacity and the interest on £80k would take you over, would it not? would this come into effect as soon as you received the £50k or at the end of the tax year, and would you have to inform them straight away or at the end of the tax year?

Think you might be right there. I tried to use the HMRC calculator to assess my own situation again recently and it doesn't seem to work, prompting for an input even though complete. It is at http://www.hmrc.gov.uk/calcs/r85/

Mikeyorks

quatro wrote: »

And it will be in my interest to keep the money in an account/s whereby I don't earn interest which will take me over my tax allowance [?]

No .... that's quite wrong.

If your taxable income is primarily derived from Savings interest then there's a 10% 'Savings only' band of £2320 on top of the £6035 personal allowance.

But, in any event, you're being a bit silly deliberately restricting the interest rate to keep you below the tax threshold. As, for every £1 you go above it ...... you still get to keep 80% of it (90% in the range £6035 to £8355). So why deliberately deprive yourself of that extra 80 / 90 pence per £1? Maximise the interest you can get.

And do consider a variable rate Cash ISA if you get into the 20% tax rate. Even if you take the interest out of it every year (or get one that pays monthly) .... it's reducing your liability, if that remains a concern.