Advice regarding tax on interest

5t3ve

I've seen a few threads pop up about making the most of the Lloyds/TSB current accounts to get a better interest rate and I'm trying to work out whether my money is better with them than in a Cash ISA.

- As a higher rate tax payer do these current accounts still work out better than a 2.25% ISA?

- How do banks know to tax my interest at the higher rate? I current pay all my tax via PAYE?

Thanks, Steve.

Linton

5t3ve wrote: »

I've seen a few threads pop up about making the most of the Lloyds/TSB current accounts to get a better interest rate and I'm trying to work out whether my money is better with them than in a Cash ISA.

- As a higher rate tax payer do these current accounts still work out better than a 2.25% ISA?

- How do banks know to tax my interest at the higher rate? I current pay all my tax via PAYE?

Thanks, Steve.

2.25% ISA is equivalent to a 3.75% non ISA account.

Banks dont know whether you are a higher rate tax payer - they simply deduct the 20% standard rate tax, the rest is recovered by HMRC decreasing your tax code. HMRC know about your interest because you tell them on your self-assessment form.

YorkshireBoy

5t3ve wrote: »

As a higher rate tax payer do these current accounts still work out better than a 2.25% ISA?

Multiply the gross rate on these current accounts by 0.6 to see the net rate for a 40% tax payer.

How do banks know to tax my interest at the higher rate?

They only tax the interest at 20%. You submit a tax return to HMRC (I think you can simply ring HMRC too if your affairs aren't too complicated?) and your other 20% is deducted via your tax code.

5t3ve

Linton wrote: »

2.25% ISA is equivalent to a 3.75% non ISA account.

Banks dont know whether you are a higher rate tax payer - they simply deduct the 20% standard rate tax, the rest is recovered by HMRC decreasing your tax code. HMRC know about your interest because you tell them on your self-assessment form.

I don't currently do a Self Assessment Form because I've never earned an income outside of my main job (which is covered by PAYE) and my ISAs. For the extra circa 1% on £4k would you say it's worth the hassle doing a Self Assessment and having to transfer money between accounts constantly to qualify for the interest rates??

epicurate

You don't need to do a self-assessment form, a very short letter will be fine. They won't want to know what accounts you have, just the amount of interest you received in a given tax year. Ring the number on your last PAYE coding letter and you can get an address to write to.

5t3ve

Thanks all, I'll do some calculations and work out whether the extra time is worth the eventual income - although to be honest ISA's seem the perfect place to stick my savings as a higher rate taxpayer.

Consumerist

5t3ve wrote: »

Thanks all, I'll do some calculations and work out whether the extra time is worth the eventual income - although to be honest ISA's seem the perfect place to stick my savings as a higher rate taxpayer.

It's certainly simpler from the tax point of view and a 40%-rate taxpayer only needs 1.8% from an ISA to get the net equivalent of the 3% gross from Lloyds (TSB is now a separate bank). Once in an ISA the interest is tax free indefinitely - until you withdraw it.