AER rates after tax?

applegrass

Hello...

I'm just trying to compare like-for-like in terms of interest rates, but need to figure out what the interest rate is after tax.

For instance, if Any Bank has an interest rate of X% AER, what's the formula for figuring out what the interest rate is after the basic rate of tax is taken off?

Thanks for your help

Andrew

YorkshireBoy

Multiply by 0.8

mum2one

Hi
The simplisest way to work out the interest rate, use an example 6.5% gross

6.5 / 100 x 82.5 =5.3

the net would be 5.3%

There may be a more scientific way, but allowing a difference of 0.1 either way, that get you by x

ManAtHome

Mum2one - does that include the 10% tax band or is it the difference between monthly and annual interest?

Applegrass - if you currently pay standard rate tax, and the GROSS interest wouldn't take you into the higher-rate band, it's multiply by 0.8 as YorkshireBoy said. If you're pulling monthly interest out, start with with the monthly rate, not the annual equivalent.

Elmer_Dudd

I use this system to figure out the rate:

£xxxxx (money to save) x 6.5% AER =£xxxxx then subtract 20% =£xxxx

To get monthly rate divide the remaining amount by 12 or
To get daily rate divide the remaining amount by 365
Seems pretty close to what my building society gives me.

mum2one

ManAtHome wrote: »

Mum2one - does that include the 10% tax band or is it the difference between monthly and annual interest?

Applegrass - if you currently pay standard rate tax, and the GROSS interest wouldn't take you into the higher-rate band, it's multiply by 0.8 as YorkshireBoy said. If you're pulling monthly interest out, start with with the monthly rate, not the annual equivalent.

Hi.
Thats not taking into account the 10% tax band, as the net is worked out at 17.5% reduction on the gross.

The formula works for monthly or annual interest, when your loking at interest rates, monthly interest tends to be slightly lower %

YorkshireBoy

mum2one wrote: »

Hi.
Thats not taking into account the 10% tax band, as the net is worked out at 17.5% reduction on the gross.

The formula works for monthly or annual interest, when your loking at interest rates, monthly interest tends to be slightly lower %

Savings income (ie interest) is taxed at 20% at source - hence my "multiply by 0.8" reply above.

Could you explain where the 17.5% comes from, because you've lost me there.

dipsomaniac

savings income is taxed 20% at source unless you declare yourself as a non taxpayer.

savings income is added to earned income to determine at what rate it is taxed. any saving income falling within the starting rate band is taxed at the starting rate (10%).

dipsomaniac

as yorkshireboy says you multiple by 0.8 to convert gross to net for a basis rate tax payer as the tax suffered is 20%

Darth_Calculus

Yes, the difference between gross and net on savings interest received is 20%.

Example: AER = 6.00%, amount invested £100

You would receive £6.00 gross interest, and if you are a UK taxpayer, 20% of this will be deducted by the bank. 20% of £6.00 is £1.20, so you would have £4.80 net interest.

So to go from gross to net, you times the gross by 0.8:

6.00% x 0.8 = 4.80%.

I too am not sure where the suggestion of 17.5% comes from. The only thing I can think of is confusion with VAT for net and gross values on invoices maybe???

mum2one

YorkshireBoy wrote: »

Savings income (ie interest) is taxed at 20% at source - hence my "multiply by 0.8" reply above.

Could you explain where the 17.5% comes from, because you've lost me there.

This is going to sound bit of a cop out, doing a financial course and one of the questions was gross to net, after working a few figures, of gross and net, I got the difference to be 17.5, tried it on 4 different figures and it worked out.