Savings Account (Tax Question)

Moncs_2

I am looking to cash in my poorly performing endowment and pay the surrender value (£6262) into a high interest savings account and continue paying monthly into this (£110 p/m)

The questions I have,
Can you calculate how much I would have in total in 15yrs time from a 4.5% savings account if you go by the figures above?

Do I have to pay tax on these savings, if so how much?

Thanks in advance

cheerfulcat

Hi, Moncs,

You can use the calculators at thisismoney to work out possible returns ( use the long term savings one ) -

http://www.thisismoney.co.uk/tools-and-calculators/calculators/index.html?in_page_id=86

But be careful using the 4.5% as an assumption. 15 years is a long time and anything could happen to interest rates. Also, once you have a result from the long term savings calculator, run it through the inflation calculator to get a more realistic figure.

The tax you pay will be determined by your tax rate. If you are a basic rate payer, the savings tax of 20% deducted at source will cover your liability. If you are a higher rate tax payer you will be liable for the difference. If you are not a taxpayer, and the interest from the account does not push you into the lowest bracket, then you may reclaim the tax paid or ask for interest to be paid gross - just ask the bank or building society for a form R85.

I know that this wasn't one of your questions but do bear in mind that over a period of time as long as you are contemplating, stock market investments generally return more than cash. You might consider putting a tiny bit of your monthly investment into a simple FTSE All-Share tracker. Just a thought :-)

HTH

Cheerfulcat

MarkyMarkD

I'm presuming that your endowment has been running for at least 10 years, as otherwise the gains on the endowment are taxable too. If this is the situation, it's probably worth waiting until after the 10 years is up.

Moncs_2

MarkyMarkD wrote:

I'm presuming that your endowment has been running for at least 10 years, as otherwise the gains on the endowment are taxable too. If this is the situation, it's probably worth waiting until after the 10 years is up.

No, it has been running only 8 years.

I am not on the higher tax band and don't complete a tax return, so how do they know what savings I have and how much to charge me?

isasmurf

Moncs wrote:

I am not on the higher tax band and don't complete a tax return, so how do they know what savings I have and how much to charge me?

As cheerfulcat says interest on all bank accounts are automatically deducted at 20% tax. It is your responsibility to inform the taxman if you should pay more, or need to claim some back.

In addition, every bank, building society and any other institution that offers accounts must report the details of your account to HMRC if requested by the taxman.

With reference to your endowment, surrending it will raise a 'chargeable event'. Taxation on chargeable events can be complicated, some are not taxable for Basic rate taxpayers (which I think is the case with endowments), others have tax deducted automatically at 20%. Anyway, when you surrender it you should receive a certificate detailing the gain and any tax paid (if applicable). The insurer is also required to be send this certificate to HMRC if the gain is above a particular amount.

Moncs_2

isasmurf wrote:

As cheerfulcat says interest on all bank accounts are automatically deducted at 20% tax. It is your responsibility to inform the taxman if you should pay more, or need to claim some back.

In addition, every bank, building society and any other institution that offers accounts must report the details of your account to HMRC if requested by the taxman.

With reference to your endowment, surrending it will raise a 'chargeable event'. Taxation on chargeable events can be complicated, some are not taxable for Basic rate taxpayers (which I think is the case with endowments), others have tax deducted automatically at 20%. Anyway, when you surrender it you should receive a certificate detailing the gain and any tax paid (if applicable). The insurer is also required to be send this certificate to HMRC if the gain is above a particular amount.

I pay £110 per month, paid in over £9000, but the surrender value is only £6262, I will be raging if they charge tax since it is £3k less that I have already paid in.

EdInvestor

Hi Moncs,

I don't think you've made a chargeable gain unfortunately

Have you considered using the money to reduce the mortgage? You "save" at a higher rate if you use the premiums an the surrender proceeds to pay down the mortgage because there is no tax payable and also because the mortgage rate is usually higher than the deposit rate.

Moncs_2

Editor wrote:

Hi Moncs,

I don't think you've made a chargeable gain unfortunately

Have you considered using the money to reduce the mortgage? You "save" at a higher rate if you use the premiums an the surrender proceeds to pay down the mortgage because there is no tax payable and also because the mortgage rate is usually higher than the deposit rate.

Yes that one of my options, I like the idea of having savings, as at the moment I only have around £4k in ISA's.

MarkyMarkD

LOL as it's worth so much less than the premiums, obviously there is no chargeable gain - apologies for the red herring.