Question about paying tax on current account interest

SchminkyCat

Hello,
I'm researching ISA's at the mo, but have noticed that the Santander 123 AER is 3% on balances over £3000. My husband and I have about £16K between our two ISAs which we could pool in my name.

I earn about £8.5-£9K over the year, but am self employed as well as employed part time, so I end up paying PAYE tax, which gets repaid after I submit my SA tax return. So how does this work with regard to paying tax on the interest earned in a bank account?

Am trying to work out if its better to open a 123 account for me and an ISA for hubby (he's higher tax rate), or to stick with ISA's for both of us.

Thanks for any help!

Lokolo

You pay the same tax as income tax band unless it is only interest that takes you over your personal allowance, then there is a 10% band.

Banks will usually automatically take off 20% tax unless you tell them otherwise.

3% after 20% tax is 2.4%
3% after 40% tax is 1.8%

SchminkyCat

Thank you - that is still better than the best instant access ISA I can find - we need to be able to access the money as we are planning on buying a house next year and might need the money for that!

Lokolo

The bank won't take off 40% tax so for your husband he will need to keep records (and keep them for at least 7 years) and pay the tax man some of the interest.

SchminkyCat

We'd open the account in my name, and it would be my wages going into it, so it would just be me being taxed. Hubby would stick with an ISA I think

jennifernil

My pension is too small to use up all my personal allowance, so all of our savings are in my name.

I am using Bank of Scotland and Lloyds Vantage accounts, and TSB Enhance accounts, all of which pay 3% on £3k-£5k.

Much better than pretty much all ISAs. You are allowed 3 accounts, so with 9 in total you could earn 3% on £45k

I have a 4% ISA finishing next month, so will need to decide what to do with that as it will be £27k to place.

Hoping for better rates very soon, but .......

eskbanker

jennifernil wrote: »

I am using Bank of Scotland and Lloyds Vantage accounts, and TSB Enhance accounts, all of which pay 3% on £3k-£5k.

Much better than pretty much all ISAs. You are allowed 3 accounts, so with 9 in total you could earn 3% on £45k

I have a 4% ISA finishing next month, so will need to decide what to do with that as it will be £27k to place.

If you haven't already, consider opening a couple of Santander 123s, as these will give you the opportunity to earn 3% gross on another £40K over and above the £45K that the 9 Vantages/Enhances will hold, i.e. you can get 3% on £85K in total. Plus a bit more in Nationwide and Clydesdale/Yorkshire of course, much smaller amounts but higher interest rate....