Tax on savings - help please!

lizferris1984

So - it's project house purchase and I will have a couple of large lump sum payments arriving from family over the next couple of years, which I need to put away somewhere, to gather interest. I am new to savings accounts, and I know tax is payable over a certain amount.

I really need to put these lump sums into fixed rate savers - reason being I don't want access to the money except for house purchase. I already have a LISA - but LISA can't hold all of the money, and instant access ISAs are no good.

I earn 17k per year. How much tax would I pay on approx 20k in a fixed rate saver (per year)? If anyone could give me a very rough guesstimate that would be great.

Liz

xylophone

Fixed rate savings here

https://www.thisismoney.co.uk/money/article-1621507/Best-savings-rates-Fixed-rate-accounts.html

£20,000 for one year at 2% would give you £400 in interest which would be paid gross.

If your only other income were your salary of £17,000 per annum, you would owe no tax on the savings income.

https://www.moneysavingexpert.com/savings/tax-free-savings/

soulsaver

You're aware that if you find the perfect bargain property and your dosh is in a fix you're unlikely to be able to access the cash immediately?

lizferris1984

soulsaver wrote: »

You're aware that if you find the perfect bargain property and your dosh is in a fix you're unlikely to be able to access the cash immediately?

I do realise that - but I don't plan to buy for another 6 years, so basically won't be looking at any houses until then. However I could choose a 2 year fix instead of a 5 year fix on that basis, just in case. Thank you

lizferris1984

xylophone wrote: »

Fixed rate savings here

https://www.thisismoney.co.uk/money/article-1621507/Best-savings-rates-Fixed-rate-accounts.html

£20,000 for one year at 2% would give you £400 in interest which would be paid gross.

If your only other income were your salary of £17,000 per annum, you would owe no tax on the savings income.

https://www.moneysavingexpert.com/savings/tax-free-savings/

Thank you for the link - I will read this today.

So would 20k be tax free for just one year on my salary, in a fixed rate saver? Or longer?

Would savings in a LISA affect this at all, or does that not count as taxable income, as it's ISA savings?

pink_pirlie

With an income of £17,000 - you'd have the full £1000 savings allowance. This means you can get interest of up to £1000 tax free.
At 2% interest you'd have to have around £50,000 in savings before interest hit this threshold.
Any interest earned on money you hold in ISAs is tax free and doesn't count towards the £1000 allowance.
If you're likely to have more than £50,000 to save (or less if you save at a higher interest rate) then to avoid tax you would need to save some of it in an ISA.

There used to be a calculator on MSE to work out whether you'd be better in savings v an ISA for taxable savings. I don't know if it's still there but worth a search if you are likely to get more than £1000pa in interest.

Zanderman

lizferris1984 wrote: »

So would 20k be tax free for just one year on my salary, in a fixed rate saver? Or longer?

Longer, indefinitely until the Gov changes the rules again. At your level of income you aren't taxed on interest until the interest is over £1000 per tax year. So £400 interest won't be taxed, ever, under those rules.

lizferris1984 wrote: »

Would savings in a LISA affect this at all, or does that not count as taxable income, as it's ISA savings?

ISAs are tax free - they don't affect any other tax allowances. Tax just doesn't apply to them at all.

lizferris1984

pink_pirlie wrote: »

With an income of £17,000 - you'd have the full £1000 savings allowance. This means you can get interest of up to £1000 tax free.
At 2% interest you'd have to have around £50,000 in savings before interest hit this threshold.
Any interest earned on money you hold in ISAs is tax free and doesn't count towards the £1000 allowance.
If you're likely to have more than £50,000 to save (or less if you save at a higher interest rate) then to avoid tax you would need to save some of it in an ISA.

There used to be a calculator on MSE to work out whether you'd be better in savings v an ISA for taxable savings. I don't know if it's still there but worth a search if you are likely to get more than £1000pa in interest.

It could end up being more than 50k in several years time - I think what I'll probably do is start with a fixed rate saver, and then if faced with another large deposit to put somewhere, maybe put that in an ISA. I have a hatred for instant access savings accounts though, sadly. Not sure yet if there's any non instant access options other than fixed rate savers, and the LISA.

I will have a look for the calculator, thank you.

lizferris1984

Zanderman wrote: »

Longer, indefinitely until the Gov changes the rules again. At your level of income you aren't taxed on interest until the interest is over £1000 per tax year. So £400 interest won't be taxed, ever, under those rules.



ISAs are tax free - they don't affect any other tax allowances. Tax just doesn't apply to them at all.

Thank you for clarifying about ISAs. I knew they were tax free in themselves, but wasn't sure if interest on an ISA would count towards the non-taxable interest limit. Clearly not, which is excellent news!

londoninvestor

lizferris1984 wrote: »

I have a hatred for instant access savings accounts though, sadly. Not sure yet if there's any non instant access options other than fixed rate savers, and the LISA.

You might consider notice accounts - e.g. Charter Savings Bank is paying 1.9% on a 95-day notice account.

Dazed_and_confused

but wasn't sure if interest on an ISA would count towards the non-taxable interest limit.

There is no limit. Interest is either taxable (standard savings accounts etc) or tax exempt.

References to "tax free" are misleading.

In the 2019:20 tax year you normally have to have income of £17,500 before you can even use the savings nil rate of tax (aka Personal Savings Allowance).

Before that you have your Personal Allowance and then upto £5,000 of savings interest which can be taxed at the savings starter rate of tax. Which is currently 0%. And is 0% in 2019:20. The £5,000 gets reduced pound for pound as your wages, pension income goes above your Personal Allowance.

So assuming you'd haven't applied for Marriage Allowance and aren't Scottish resident for tax purposes your tax liability on £17,000 of taxable salary would be £900 (£17,000 - £12,500 = £4,500 x 20% = £900).

Your £400 interest would be taxed at the savings starter rate of tax of 0% so no tax actually payable on the interest.

You have another £100 of the savings starter rate of tax available if you earned more interest.

And only then are you able to use the savings nil rate of tax (aka Personal Savings Allowance). This is upto another £1,000 taxed at 0%.