To save or overpay mortgage - confused re tax on savings.

DaftMule

After reading the article about "Should I pay off my mortgage", the calculator says that, at my new rate of 3.89% I'd need to "earn 4.9% as a basic rate taxpayer or 6.5% at the higher rate" in a savings account to make a savings account more viable.

So, am I right in assuming the following:

1) If I can take out a Cash ISA at 6.25% then I should definitely do that first.

2) Another option would be for my wife, who is not working atm, to open a savings account in her name and we could put the spare cash in that. I'm assuming here that any tax paid on the savings would fall within her personal allowance so she shouldn't pay tax on the savings?

3) because of 1 and 2 above, overpaying into mortgage is not sensible for us (we have about 70% LTV)

The confusion for me is how tax on savings works if you are not working therefore not paying tax. Is it paid automatically and it is up to the account holder to claim back the tax or is there a declaration form (like you have for kids savings) that you need to complete when opening the account to state you need not pay tax?

Thanks.

Lokolo

1) Yes
2) Yes
3) Yes

but people still do it as mortgages are a debt, and most people don't want debt. But remember only bad debt is bad, debt isn't bad!

To get tax free interest your wife must have the savings accounts in her name (so keep her happy so she doesn't run off) and she must fill in an R85 form. Most banks who have online access nowadays you just press a button to get tax free interest. Egg do anyway. Halifax you phone a number and ask for it they do it straight away.

The form: http://www.hmrc.gov.uk/forms/R85.pdf

Usually interest is paid after 20% tax. So a normal rate payer would do nothing. A higher tax payer would have to fill in tax return and pay money to HMRC. And non tax payers would have to claim it back if they hadn't filled in an R85.

DaftMule

Thanks Lokolo :-)

cos69

Lokolo wrote: »

To get tax free interest your wife must have the savings accounts in her name (so keep her happy so she doesn't run off)

LOL - my wife now has 90% of our savings in her name to reduce tax which is a worry :eek:

Have to visit the florist and chocolate shop again today

cos69

Daftmule - you also need to make sure that if you did make a lump sum repayment off the mortgage they take account of that straight away on the interest calculation. Not sure all mortgage vendors do that.

Also your limited to £3600 for an ISA, so might be worth looking around for a short term fix if you can find it - decent deals are going fast.