Tax on savings

Whumpty

I am a stay at home mum with no income at all. My husband is employed full time earning a good wage. We don’t claim any benefits and we have 2 young children.

We have maxed out our stocks and shares ISA’s for the year and I have been looking at opening a taxable trading account. Seems like a bad idea for my husband as interest would be taxed at 45%.. I’m confused about what my tax free allowance would be?

I get that I have a £1000 savings allowance but I’ve since read that I would get an extra £5000 (as I’m unemployed) but then what about the £12500 personal allowance? 

Basically I’m hoping someone can help me work out what amount of interest I can earn per year without paying tax? 

I’m confused about whether interest earned counts as income and so towards the £12500.

Any help gratefully appreciated!

Thanks

Jen

[Deleted User]

Hi,

have a read here, might help.

eskbanker

Your taxable income would be allocated first to your personal tax allowance (£12,500) and then you could also allocate the next £5K of savings interest against the starting savings rate and finally another £1K to the personal savings allowance, so you can effectively earn £18,500 of savings interest without paying any tax if you have no other income.

However, if you're investing in a taxable trading account, then the income from that would typically be dividends, and growth would be subject to capital gains tax, which are different tax regimes from the above, although the dividend arrangements overlap with the savings in that they'd also use the main personal allowance for income tax, but there is also a separate £2K dividend 'allowance' (nil-rate band)....

There's plenty of good reading material on tax for low earners at https://www.litrg.org.uk/tax-guides/tax-basics

bowlhead99

A 'trading account' invested in stocks and shares does not generally earn 'interest' unless the investments made are in interest paying bonds. I'm guessing that the things you have bought inside your S&S ISAs are probably company shares or investment funds that pay dividends rather than interest. If you do the same in your trading account, it's dividend tax and allowances that are relevant, rather than savings interest tax and allowances.

Whumpty said:

I’m confused about whether interest earned counts as income and so towards the £12500.

Interest income, dividend income, property rental income, employment income is all 'income', and your personal allowance covers up to the first £12500 of income in any tax year. You say you currently don't have any income at all. If you start to receive investment income from your new taxable S&S investment account (whether it's interest income or dividend income or property income distributions) you will start to use up the £12500. Only after the £12500 has been fully used up, will you need to worry about further income being covered by interest allowance (£1k), dividend allowance (£2k) or the starter 0% rate for savings interest income (£5k)

Alexland

Whumpty said:

I am a stay at home mum with no income at all. My husband is employed full time earning a good wage. We don’t claim any benefits and we have 2 young children.

Is your husband able to make additional pension contributions to reduce his adjusted net income down to claim some or all of child benefits? It is also likely to be more tax efficient than drawing the income to contribute into S&S ISAs. Even if he is an additional rate taxpayer he may have carry forward allowance.

Even if you are not taking the money for child benefits have you registered in your name to get the National Insurance credits to earn your entitlement for state pension?

Whumpty

Thanks all, as far as I'm aware there aren't any dividends - I want to invest in Vanguard VWRL (I already have invested here). So am I looking at dividend tax and allowances or savings interest tax and allowances?

Husband already makes additional contributions into his work based pensions but not possible (at this point in the tax year) to make enough contributions to bring him down to claim child benefits.. I would also feel uneasy as whilst I want to be smart about investing in the right place to not pay extra tax where not necessary I don't feel right claiming benefits when so many other people need them and we don't.

eskbanker

Whumpty said:

Thanks all, as far as I'm aware there aren't any dividends - I want to invest in Vanguard VWRL (I already have invested here). So am I looking at dividend tax and allowances or savings interest tax and allowances?

The dividends from VWRL are shown at https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/distributions

Alexland

Whumpty said:

I would also feel uneasy as whilst I want to be smart about investing in the right place to not pay extra tax where not necessary I don't feel right claiming benefits when so many other people need them and we don't.

But as a mother you are entitled to get NI credits towards your state pension by registering for child benefits even if you don't claim the child benefits money due to your partner's high income.

https://www.moneyadviceservice.org.uk/en/articles/protecting-your-state-pension-when-you-have-a-baby#protecting-your-state-pension

"Even if you don’t think you’ll be entitled to anything because either you or your partner earns over the £50,000 tax-free limit, it’s still worth claiming so you don’t miss out on National Insurance credits."

ChilliBob

I'm watching and reading this with interest as I'm in a similar position. I'm a bloke, I was made redundant and forced to sell some shares, so now my income from 'employment' has dropped to zero. My partner (not yet wife, wedding postponed due to Covid) is working full time and we have a toddler, all we're getting is the 15 hrs care as of Jan this year.

I did earn a decent income till Nov thou, so any interest this year will be taxed. 

So as of April, if I'm not employed I guess I get 'reset to zero' so to speak as regards Tax? And I'd get the above allowances? I. E. 
12'500+5000+1000=18,500.
Now if I make investment, outside of an ISA then I'll get:
* Dividend tax once I'm over 2k
* CGT - if I decide to sell anything, I get around 15k here allowance too. 

If you end up facing dividend tax of cgt I guess that comes out of your personal allowance and hence reduces what you can get from savings tax free. 

This year I'll be getting an accountant on the case as my tax situation is complex, but next year it should be far simpler! 

Dazed_and_C0nfused

ChilliBob said:

I'm watching and reading this with interest as I'm in a similar position. I'm a bloke, I was made redundant and forced to sell some shares, so now my income from 'employment' has dropped to zero. My partner (not yet wife, wedding postponed due to Covid) is working full time and we have a toddler, all we're getting is the 15 hrs care as of Jan this year.

I did earn a decent income till Nov thou, so any interest this year will be taxed. 

So as of April, if I'm not employed I guess I get 'reset to zero' so to speak as regards Tax? And I'd get the above allowances? I. E. 
12'500+5000+1000=18,500.
Now if I make investment, outside of an ISA then I'll get:
* Dividend tax once I'm over 2k
* CGT - if I decide to sell anything, I get around 15k here allowance too. 

If you end up facing dividend tax of cgt I guess that comes out of your personal allowance and hence reduces what you can get from savings tax free. 

This year I'll be getting an accountant on the case as my tax situation is complex, but next year it should be far simpler! 

Once you have used your Personal Allowance anything else gets taxed but at the moment there are three different 0% tax rate bands which mean you can potentially have taxable income of £20,500 and pay no tax.

Savings starter rate (upto £5,000)
Savings nil rate (upto £1,000)
Dividend nil rate (upto £2,000)

In certain situations income taxed at 0% can a really add to your overall tax liability.  For example if you had taxable earnings of £50,000 interest of £500 and dividends of £2,000 you would pay no tax on the interest or dividends but you would become liable to the High Income Child Benefit Charge (if part of a Child Benefit household).  Similarly you would stop being eligible for Marriage Allowance despite not actually paying any higher rate tax.

ratechaser

OP - you previously mentioned that your OH would end up being taxed at 45% - so he's currently an additional rate taxpayer earning over £150k?

In that case, I'd certainly agree you've got no chance of getting income down to a level where child benefit is ever going to come in to play, but can he get it below £150k at least so that he regains a £500 savings allowance? 

Or if he has enough pension carryover from previous years, is there any way he can make further contributions (or open a separate SIPP) to get his income down to £100k, thereby regaining his personal allowance (that is eroded to zero between the £100-125k income band).

At the very least, (and assuming you have a happy and stable marriage). I'd be making certain that any savings you have outside of a tax free wrapper, are in your name only...

Been there, done this myself - lots of arbitrage options to reduce tax liabilities... although was obviously more relevant a few years back when you could actually earn a decent amount of interest on cash!