Transferring to ISA to avoid paying tax on savings

acjohnson

I have 2 questions relating to this.

I've read the following MSE webpage: "Top cash ISAs 2017/18"

At the bottom of the page under 'Alternatives to ISAs', the answer to the first FAQ states:

"But if you're thinking "I want high rates AND a tax-free savings pot", there is an answer. You could put cash into a higher-paying account.... then a week before the end of the tax-year (6 April), move the cash into an ISA."

I have just opened a number of accounts to take advantage of the higher interest rates offered for linked 'regular saver' accounts, along with accounts that have higher interest rates than normal for a limited amount of money in the account eg Nationwide offer 5% on anything less that £2,500 in their FlexDirect account.
The interest accrued won't exceed my Personal Savings Allowance (PSA) for this year. However, for next year I think it will be close. From the above advice on MSE if I transfer the full balance of the regular savers with the interest added at the end of the 12 month term, along with the savings in accounts like the FlexDirect and interest accrued into an ISA in March 2019 will this mean I can avoid paying tax on the interest from these accounts if they exceed my PSA?

My second question is regarding how HMRC calculate the tax owed on interest creating savings above the PSA. I assume HMRC are informed by banks automatically now (via 'Connect' software, see Telegraph article online 25/6/15: "What does the taxman know about you... ) regarding interest earned from bank accounts. HMRC may calculate tax owed because I have earned more than the PSA through interest on savings. I can't see anything on the HMRC website in the 'Notes to help you fill in the R40 HMRC form' (Claim for repayment of Income Tax deducted from savings and investments) that explains the savings have been moved to an ISA and are therefore exempt. Therefore, how do you reclaim this if you are taxed, but have followed the above MSE advice which I assume I've interpreted correctly?

Dazed_and_confused

What makes you think transferring them to an ISA avoids any tax liability on the non ISA interest?

TCA

R40 is used if you've paid too much tax and don't complete a self assessment return. Any savings interest earned within ISAs is tax-free. If in a given tax year you earn more interest outside of your ISAs than the PSA and you haven't enough personal allowance left to cover it because of other income, then you'll likely have to pay tax. There's also the £5k starting rate for savings (£5k at 0%) but whether you get that depends on your other income.

Note that all savings interest is now paid gross, no tax deducted, so you're unlikely to be reclaiming tax on that basis alone. i.e. there would likely be other income you'd been overtaxed on for some reason if you're using R40. You seem to be confusing two things. You ask how HMRC calculate tax owed but conflate this with R40 which is a mechanism for the individual reclaiming overpaid tax from HMRC, not the other way round.

Dazed_and_confused

My second question is regarding how HMRC calculate the tax owed on interest creating savings above the PSA


All interest which was previously taxable remains taxable, there is no "allowance" which alters this however there are two 0% tax rates which mean some savings interest can be taxed at 0% and therefore result in no actual tax being due.

Starter savings rate is up to £5,000 taxed at 0%

Personal Savings Allowance rate is upto £1,000 taxed at 0%

HMRC only seem to receive limited information from banks so you may need to report some details yourself. See final section of the link below on gov.uk

https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

acjohnson

Dazed_and_confused wrote: »

What makes you think transferring them to an ISA avoids any tax liability on the non ISA interest?

The advice from the webpage quoted above:
"But if you're thinking "I want high rates AND a tax-free savings pot", there is an answer. You could put cash into a higher-paying account.... then a week before the end of the tax-year (6 April), move the cash into an ISA."

So do I interpret that as the money moved in the above scenario would have to be below the PSA threshold to avoid paying tax on it?

acjohnson

Dazed_and_confused wrote: »

HMRC only seem to receive limited information from banks so you may need to report some details yourself. See final section of the link below on gov.uk

Thanks, I think this helps clarify that HMRC do receive info from banks. From the HMRC link:

"For sole bank account holders... Banks and building societies will give HMRC the information they need..."

HMRC receives info from sole bank accounts (which I have) not in Self Assessment, but if you're a joint bank account holder not in Self Assessment you should contact HMRC with relevant saving income.

RG2015

acjohnson wrote: »

Thanks, I think this helps clarify that HMRC do receive info from banks. From the HMRC link:

"For sole bank account holders... Banks and building societies will give HMRC the information they need..."

HMRC receives info from sole bank accounts (which I have) not in Self Assessment, but if you're a joint bank account holder not in Self Assessment you should contact HMRC with relevant saving income.

Has this changed? I thought that interest on joint bank accounts was automatically split 50:50 without any need to inform HMRC.

TCA

acjohnson wrote: »

The advice from the webpage quoted above:
"But if you're thinking "I want high rates AND a tax-free savings pot", there is an answer. You could put cash into a higher-paying account.... then a week before the end of the tax-year (6 April), move the cash into an ISA."

So do I interpret that as the money moved in the above scenario would have to be below the PSA threshold to avoid paying tax on it?

Remember that the PSA threshold is in respect of the interest amount, not the capital. The quote you ask about is really just saying (badly) that you can earn higher interest from a current account (than a cash ISA) but still use your ISA allowance for that year, so you benefit from tax-free gains going forwards in future tax years.

Interest paid to a non-ISA savings account in a given tax year is taxable subject to your various allowances. Interest paid within an ISA in a given tax year isn't taxable. So interest paid on money moved into an ISA just before the tax year end will still be taxable (subject to allowances) up until that point.

Norman_Castle

acjohnson wrote: »

You could put cash into a higher-paying account.... then a week before the end of the tax-year (6 April), move the cash into an ISA."

Moving money into an isa doesn't negate interest earned elsewhere.

Biggles

That FAQ is clumsily worded at best. At worst, it's totally misleading.

msallen

I think the point the article is (badly) making is that if you have a flexible Cash ISA you can maintain your historical amount of ASA allowance for future use if/when Cash ISA rates become worthwhile.

For example on 5/4/18 you could put £20K into it and then withdraw it all again on 6/4/18. Then on 5/4/19 you could put £40K in (the previous year's mainatined allowance plus the current year's), and draw it all out again on 6/4/19. Then on 5/4/20 you could put 60K in etc etc.

Then if in a few years you considered it worthwhile to put all your savings into an ISA you will have built up a sizeable allowance.