Savings tax affecting income tax - help?

Bumpy

We are very fortunately recieving £100,000 to invest and have the interest.

My earnings are around the level where the potential interest might well bump me into the 40% income tax bracket.

I've checked the government site, but it is worded oddly and I can't understand it.

If the interest is taxed at source at 20%, and therefore the amount we recieve with the 20% already taken off does NOT move me into the higher bracket, does that mean any subsequent overtime I do that pushed me over, is taxed at 40%?

Is interest always taxed at source by the bank/building society? And therefore the entire amount will be 20% less before I get it thereby reducing the amount that is over the £33,000 limit?

Sure;y they get more money by giving it all to us before any is taken off, thens eeing how much is over, and taking 40% of THAT?

Also I do not fill out a tax return - will I have to do so?

Any help appreciated. I'm a bit lost with this as you can no doubt tell. I've only ever had to deal with debt before.

oldfella

if your gross earnings + gross interest take you over around £37000 you will owe higher rate tax on the amount over that.

your earnings will continue to be taxed as normal - you will need to inform HMRC that you owe them.

Mike

Bumpy

oldfella wrote: »

if your gross earnings + gross interest take you over around £37000 you will owe higher rate tax on the amount over that.

your earnings will continue to be taxed as normal - you will need to inform HMRC that you owe them.

Mike

Sorry if I'm being stupid - why £37,000 not £33,000?

By gross earnings do you mean what I earn before any tax (and NI etc?) is taken off?

EdInvestor

Try National Savings index linked certificates - they are tax free.

Bumpy

EdInvestor wrote: »

Try National Savings index linked certificates - they are tax free.

Thank you for your suggestion, however we have no choice in how or where it is invested.

thumshie

Check out
http://www.hmrc.gov.uk/rates/it.htm
and
http://www.finance-glossary.com/terms/tax-brackets.htm?id=1396&ginPtrCode=00000&PopupMode=False

Because of a personal allowance, this effectively 'moves' the band threshold to over 37k

Cook_County

What you might consider is investing more in pensions if you want to reduce your total income below the level of the 40% tax bracket (and also not have to file tax returns).

bristol_pilot

You will need to ask HMRC to send you a tax return. If you just leave it, they will find out anyway (possibly several years down the line) and you will have to fill in the forms retrospectively which is an administrative nightmare. The way to keep on top of 40% tax is to fill your tax return in every year as soon as possible after the end of the tax year in question.

To reduce your liability to 40% tax you can move investments into tax-free investments such as ISAs and National Savings or pay more into your pension scheme. If you have a non-working partner, send them out to work instead of doing overtime yourself, the overall tax will be lower unless they are on 40% too.

Reestit_Mutton

Bumpy wrote: »

Thank you for your suggestion, however we have no choice in how or where it is invested.

*absolutely* no choice whatsoever?...that's a shame.

If your interest is likely to push you into the 40% band, this is a very good reason for putting 30K into premium bonds...not only will the effective interest rate seem attractive to a 40% tax payer (because it is tax free) but the ability to dodge the annual paperwork necessary when you hit the 40% band is priceless in my book.

Putting 30K into premium bonds would be like slicing approx £1500-£1800 off your gross taxable pay - if, as you say, it would only be any overtime that you choose to do that would tip you over the 40% threshold then the removal of this money from the tax net should be enough to keep you safe from the 40% threshold for a while.

Than again...based on your previous question about the level of the threshold, it sounds as if you might be well clear of teh 40% threshold afterall (if you assumed it was around the 33K level).

HtH
Reestit Mutton

Bumpy

That isn't possible bristol-pilot as my wife is disabled. Also, we have no control AT ALL over where the moeny is. We are simply allowed to have the generated interest.

I am lost as far as tax returns go, as have never filled one out. Also have no intention of leaving anything, would rather pay immediately.

Think it's probably best to leave it and contact the tax department when the moeny comes in. All the advice here, well intentioned as it is, is either confusing or not relevant.

bristol_pilot

You say 'we' will be getting interest on £100k. Who does the interest belong to? You, your wife or joint? If joint, half of it will be considered your wife's and does not count as part of your income. That part will be taxed at your wife's rate.