Monthly or Annual Interest - Tax Free in 2016 ?

Mr_K
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Hi, advice please !

Just about to open a new savings account. It has an option of monthly or annual interest, the rate is the same.

Usually I opt for monthly interest, however at the moment that would be taxed until April 2016 when the rules change so that interest would tax free from then on. However if I opt for annual it wouldn't get paid for a year at which point interest will be tax free (covering the whole year ?). Have I understood this right ? If so annual seems they way to go ? Or does the tax get pro-rata'd somehow if you go for annual interest to cover the taxable bit of the year and non-taxable bit ?

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  • teddysmum
    teddysmum Forumite Posts: 9,452
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    As you don't get the interest until after the new legislation , I assume it will be tax free , as interest is taxed when you receive it into your account.
  • Mr_K
    Mr_K Forumite Posts: 1,171
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    teddysmum wrote: »
    As you don't get the interest until after the new legislation , I assume it will be tax free , as interest is taxed when you receive it into your account.

    That's how I interpret it. So anyone who opens a savings account now and opts for monthly interest is just throwing away money to the Govt. Surprised this hasn't been highlighted by that clever Martin bloke.
  • dcweather
    dcweather Forumite Posts: 57
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    I bet I know what will happen. Most Banks and Building Societies will drop their gross rates by 20% on some other pretext so that you end up getting the same! Watch this space for Santander 1-2-3 to drop to 2.5%. So a lot of people won't notice because they end up with the same and Santander pick up the benefit meant for us!
  • TheBanker
    TheBanker Forumite Posts: 1,587
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    dcweather wrote: »
    I bet I know what will happen. Most Banks and Building Societies will drop their gross rates by 20% on some other pretext so that you end up getting the same! Watch this space for Santander 1-2-3 to drop to 2.5%. So a lot of people won't notice because they end up with the same and Santander pick up the benefit meant for us!

    Their marketing department would have fun promoting the 1 - 2 - 2½
    account...
  • bigfreddiel
    bigfreddiel Posts: 4,263 Forumite
    teddysmum wrote: »
    As you don't get the interest until after the new legislation , I assume it will be tax free , as interest is taxed when you receive it into your account.

    You can earn £5,000 tax free interest right now if your other earnings are less than £10,600 no need to wait for new legislation.

    Cheers fj
  • colsten
    colsten Forumite Posts: 17,597
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    dcweather wrote: »
    Watch this space for Santander 1-2-3 to drop to 2.5%.
    They don't need to change their interest rate. They just raise the monthly charge (e.g. to £5 in Jan), and the interest rate indirectly plummets for everyone.

    I have calculated that I effectively get 2.98% gross right now, including the effects of the cashback. From January onwards, my gross rate, again including effects of cashback, will be 2.78%. This is still better than I can get anywhere else as I have already maxed the higher rate accounts.

    But it won't be the same for everyone as it all depends on how much cash you have in your 123(s), how much the cashback is, and how much tax they need to pay on their interest. For some people the account is no longer viable as the costs outweigh the benefits. Everyone needs to do their own numbers.

    The only thing we know for certain is that basically everyone will get less money from Santander (unless people magically manage to increase their monthly DD cashback receipts by a substantial amount).
  • colsten
    colsten Forumite Posts: 17,597
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    Mr_K wrote: »
    So anyone who opens a savings account now and opts for monthly interest is just throwing away money to the Govt.

    You cannot generalise like that as there are accounts which pay monthly interest at higher rates than you'd be able to achieve with savings accounts that pay annually. Also, the Regular Savings accounts limit the amount of money you can pay in monthly. It's a matter of actually working out the return over the next 12 months, taking into account the individual's tax rate.

    "Throwing away money to the Govt" is a fairly short-sighted way of looking at things. It can often pay more for yourself if you pay tax than if you 'cleverly' choose a tax-free option.
  • jamesd
    jamesd Forumite Posts: 25,833
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    Mr_K wrote: »
    So anyone who opens a savings account now and opts for monthly interest is just throwing away money to the Govt.
    Hardly. I'm anticipating receiving more than £5k in interest between now and April and over £10k next tax year. There's nothing for me to gain by deferring interest.

    For people who will receive relatively low amounts of interest within the tax free limit the delay is a good move.

    Still, the biggest cost overall is using a savings account instead of investing. It's easy to get 8%+ using P2P at the moment. As always with investing some risk to capital comes along with it even though I'd suggest secured lending.

    I've been getting such good deals on P2P, like 1.5% interest a month on one not generally available, that I've even found it beneficial to do some moving of money from ISA out of ISA, allowing for my anticipated future ISA contribution levels. 1% a month is a more generally available quite high level.

    So you're right about the potential tax gain but do be sure that you don't let the tax issue overshadow the bigger picture. And do be sure that you don't invest more than sensible and keep an ample emergency fund.
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