HELP - Basic tax payer - but I will have alot of savings

itsjustmexx

I am a basic rate tax payer.
I understand how tax is worked out on the interest on my savings.

BUT I will soon have alot of money to put into savings.
Lets assume I put all the money into 1 account (I won't) and the interest which I earn from these savings (after the 20% tax is taken off) takes my 'earnings' into the realms of a a higher tax band.
Do i then have to pay more tax?? (on my already taxed interest)


I'm a bit baffled as to how this will work, so any help would be appreciated please!

colsten

If your total income after personal allowance is between £31,866 and £150,000, you need to pay 40% tax in 2014-15 (different figures in 2015-16). You will have to tell the HMRC if the interest from your savings moves you into the 40% bracket.

It might be possible to reduce your tax liability by making additional pension contributions and/or putting some money into ISAs.

You would better ask your questions on the pensions and/or cutting tax boards. Depending on the size of your cash pile, it might also be a good idea to pay for professional advice from an IFA. Find one on unbiased.co.uk if friends/colleagues don't have any recommendation.

kidmugsy

Suppose your only income is that you earn £40k p.a. (after current pension contributions). Suppose your interest, after 20% income tax, comes to £4k p.a. First you calculate the "grossed up" value of the interest (i.e. you add the tax back on), getting £5k p.a. So now your taxable annual income is £40k + £5k = £45k. Subtract your personal allowance of £10k (2014-15) and you have £35k exposed to income tax. On the first £31,866 you pay 20%; on the remaining £3134 you will owe 40%.

The way that many people avoid that 40% bit is that they make a pension contribution. So you write a cheque for £3134 x 0.8 = £2507 and send it off to the pension provider. They claim back £627 from the taxman and add it to your pension "pot". The remaining tax rebate is claimed direct from HMRC by you. If you get the timing right, rather than paying the 40% tax and then claiming the rebate, you can just avoid paying the 40% altogether, which has the same financial effect but is less trouble.

itsjustmexx

ok, that makes sense!
so i take my salary(pension aside), plus my interest earned (both before tax) and that total sum is my income for the year, therefore is due for the normal income tax bands!
will that mean i will have to start filling in self assessment tax forms, as presumably it can only be worked out by me!?

sorry to be a numpty, but i've never had any more than my meagre salary and very few savings before now.

guymo

You'll certainly need to tell HMRC about it. You may have to complete a tax return (e.g. if the savings income is over £10k) but if it's a relatively small amount and the majority of your tax is via PAYE then you can just declare the savings income over the phone and pay via an adjusted tax code.

Just give them a call. The most difficult part is waiting in the queue on the phone.

itsjustmexx

SO
IF salary plus interest earned (before tax) is less than £41,865, all the tax is taken off at source, so i dont need to do anything else myself?
correct?

CLAPTON

itsjustmexx wrote: »

SO
IF salary plus interest earned (before tax) is less than £41,865, all the tax is taken off at source, so i dont need to do anything else myself?
correct?

yes, unless you pay any money into a pension in which case you can earn more before 40% tax kicks in

bowlhead99

Correct:

If you don't owe higher rate tax on anything and your employer has deducted your PAYE and NI correctly and the bank has deducted 20% off your interest correctly, nothing else to do.

Obviously if someone paying you interest that's taxable is paying it gross (e.g. certain National Savings & Investments products) then you'll need to make sure you tell HMRC to pay your 20%. But UK banks and building societies all pay net of the 20% unless you've told them not to.

itsjustmexx

Thankyou all
thats cleared it all up