Gross interest

adonis10

Person A is 63, receives state pension of £6,200/ annum and has the standard 7,475 PA. They receive £2,000 in savings interest during the year. Are they taxed at 10% or 20% on the £925 above the PA?
The 10% band for savings income is £0-£2,560 - does this mean up to £2,560 in savings income AFTER the PA?
Also, as they don’t currently pay tax any interest is paid gross, would they be able to continue doing this and then declare the savings income over the PA, or go through the laborious process of paying 20% on everything at source and then claiming back any excess at the end of the tax year?

System

adonis10 wrote: »

Person A is 63, receives state pension of £6,200/ annum and has the standard 7,475 PA. They receive £2,000 in savings interest during the year. Are they taxed at 10% or 20% on the £925 above the PA?
The 10% band for savings income is £0-£2,560 - does this mean up to £2,560 in savings income AFTER the PA?
Also, as they don’t currently pay tax any interest is paid gross, would they be able to continue doing this and then declare the savings income over the PA, or go through the laborious process of paying 20% on everything at source and then claiming back any excess at the end of the tax year?

The following is from the HMRC web site and explains the terms of the 10% starting band:

Income Tax rates and taxable bands 2011-12

Starting rate for savings: 10%* = £0- £2,560

* From 2008-09 there is a 10 per cent starting rate for savings income only. If your non-savings income is above this limit then the 10 per cent starting rate for savings will not apply.

So, from the above, it would be my understanding that you would not get the 10% starting rate.
My appologies, I stand corrected, the note on the HMRC web site is misleading, it should have stated "taxable non-savings income" which would have made it clear.

They would need to pay 20% tax on the savings interest and reclaim any over payment of tax.

You should make sure that you take advantage of your full ISA allowance each year to minimise the tax on savings interest. (I see you are already doing this)

ceeforcat

1) Yes 2560 after the PA.

2) It seems to me Person A is a taxpayer by virtue of his gross interest and it should not be paid gross. Using the figures that you provided for 2010/11 they have a tax liability 0f £172.50. (8200-6475 @10%).

3) For this tax year, again the interest cannot be paid gross and you do have to through the process as described which is, I agree, a complete pain!

adonis10

ceeforcat wrote: »

1) Yes 2560 after the PA.

2) It seems to me Person A is a taxpayer by virtue of his gross interest and it should not be paid gross. Using the figures that you provided for 2010/11 they have a tax liability 0f £172.50. (8200-6475 @10%).

It relates to next year as the lump sum has only recently been paid to the person.

3) For this tax year, again the interest cannot be paid gross and you do have to through the process as described which is, I agree, a complete pain!

I have calculated it and it works out that the interest will take the person £174 above the £7,475. How very, very annoying! I assume one cannot get gross interest on say 4 out of 5 accounts, and net on one?



Any other methods to avoid this? Full ISA allowances have been made use of.

The person is married, are there any married couple allowances?

ceeforcat

Married helps - transfer sufficient balance to spouse which realises £174 of interest. Person A can then register for gross interest. My calculations make it 8.7% of the balance. You will lose out on the 10% band on 174 equivalent to £17.40 tax - may be worth it.

adonis10

ceeforcat wrote: »

Married helps - transfer sufficient balance to spouse which realises £174 of interest. Person A can then register for gross interest. My calculations make it 8.7% of the balance. You will lose out on the 10% band on 174 equivalent to £17.40 tax - may be worth it.

Ah yeah, so person a will get gross interest and the spouse will just have to claim back the the additional 10% deducted at source? Still have to go through the rigmarole but it means person a, already getting the bulk of the interest, gets it all gross.

I'm with you now!

ceeforcat

Always assuming that the spouse could also be in a position to receive interest gross?

jennifernil

Unless the spouse is a non-taxpayer, or the savings would only be taxed at 10%, I would think there is little point in transferring some of the savings to them.

Person A can reclaim on 6th April, repayment is quite quick. The only advantage would be getting more of the interest sooner, but the overall income would be the same, or even less if spouse is taxed at 20%.

Mikeyorks

adonis10 wrote: »

I assume one cannot get gross interest on say 4 out of 5 accounts, and net on one?

No - you can't do that. The R85 to obtain gross interest contains a declaration, that will be being signed incorrectly.

The way around it - as suggested - is to apportion some of the savings to the spouse if s/he has some spare capacity on the personal allowance.