Confused about Tax allowance on savings

Mary_Alice

I have been reading lots of MSE advice and posts as I will soon have around £80,000 inheritance to put somewhere safe. I know I will have to split it between banks due to the 85K safety net. I was looking to put most of it in a 2% Bond for a year as I know I won't need it until I decide what is best. This would generate interest over the £1000 allowance so I would have to pay tax I presume.?? However as it will be starting this in Sept I guess the tax is paid in the Tax year so can I use both tax years as the interest is paid on the anniversary?  Its not the paying of the tax that is the issue , it is what it is, But I wouldn't know HOW to do it so want to avoid that scenario if possible.
For years I have worried about paying bills/mortgage etc , but viewed it as a challenge to balance the books. Now I won't have to worry I am still worrying as I just don't know what to do with it. 

Dazed_and_C0nfused

You don't actually pay tax on interest unless your total taxable income is at least £17,310 (if you have applied for Marriage Allowance) or £18,570 (if you haven't applied for Marriage Allowance).

The £1,000 figure (savings nil rate band, often referred to as the Personal Savings Allowance) isn't of any use to a lot of people as they don't have sufficient income for it to be relevant i.e. their Personal Allowance and the savings starter rate of tax means they don't pay tax on the interest.

If you provide details of what other taxable income you have then it should be possible to explain how the interest would be taxed.

In most cases interest is taxable in the tax year it is paid.

Albermarle

You can get a better rate than 2% for a one year fix. All banks in this list are covered for £85K compensation,

Best 1 Year Fixed Rate Bonds Up To 2.72% Fixed | moneyfacts.co.uk

Mary_Alice

Dazed_and_C0nfused said:

You don't actually pay tax on interest unless your total taxable income is at least £17,310 (if you have applied for Marriage Allowance) or £18,570 (if you haven't applied for Marriage Allowance).

The £1,000 figure (savings nil rate band, often referred to as the Personal Savings Allowance) isn't of any use to a lot of people as they don't have sufficient income for it to be relevant i.e. their Personal Allowance and the savings starter rate of tax means they don't pay tax on the interest.

If you provide details of what other taxable income you have then it should be possible to explain how the interest would be taxed.

In most cases interest is taxable in the tax year it is paid.

My earnings are £28,000 per year so I pay Tax on that. That is all. I have 12 years before retirement, and have 3 old work base pensions that total around £35,000 which I am not touching until I retire. Thanks

libra10

If the investment was saved in an ISA would the interest rate still be counted as taxable income?  Although all the money couldn't be invested in an ISA this year, it would reduce any tax liability.
Although the interest received would probably be less, there woudn't be an issue about having to complete tax forms.

eskbanker

Mary_Alice said:

I will soon have around £80,000 inheritance to put somewhere safe. I know I will have to split it between banks due to the 85K safety net. I was looking to put most of it in a 2% Bond for a year as I know I won't need it until I decide what is best.

[...]

For years I have worried about paying bills/mortgage etc , but viewed it as a challenge to balance the books.

If you'll be receiving £80K and implicitly (from the latter remark) don't already have significant savings then surely you're unlikely to breach £85K, but in any case that limit doesn't apply at first to money received from inheritance, where up to £1m is protected for up to six months, so you have plenty of time to consider your options before that £85K limit would come into play:

https://www.fscs.org.uk/making-a-claim/claims-process/temporary-high-balances/

EthicsGradient

If the money comes to you in September, then it's probably worth using a bond that pays monthly interest eg (from the current MSE page) Charter Savings Bank at 2.71%. Monthly, that would get you probably 6 months in the 22-23 tax year, and 6 months in the 23-24 year, which would mean you're barely over the £1,000 allowance for either. If you picked once that pays annually (ie at maturity, for a 1 year bond), then it would all be taxable at that point, ie £2,200 on £80,000, for the Tandem or Secure Trust ones listed.

Mary_Alice

eskbanker said:

Mary_Alice said:

I will soon have around £80,000 inheritance to put somewhere safe. I know I will have to split it between banks due to the 85K safety net. I was looking to put most of it in a 2% Bond for a year as I know I won't need it until I decide what is best.

[...]

For years I have worried about paying bills/mortgage etc , but viewed it as a challenge to balance the books.

If you'll be receiving £80K and implicitly (from the latter remark) don't already have significant savings then surely you're unlikely to breach £85K, but in any case that limit doesn't apply at first to money received from inheritance, where up to £1m is protected for up to six months, so you have plenty of time to consider your options before that £85K limit would come into play:

https://www.fscs.org.uk/making-a-claim/claims-process/temporary-high-balances/

I have £12,000 saved up slowly in an ISA over many years 

Bridlington1

As you are a basic rate taxpayer you will benefit from the £1000 personal tax allowance. Assuming you fix for 1 year at 2.72% you would generate £2176 pre tax in interest. Deduct the £1000 personal tax allowance leaves you with £1176 taxable interest. 20% of £1176 is £235.20. Thus you would pay £235.20 in tax.

It is worth noting that this would count towards the 2023-24 tax year as the interest would be paid in July 2024. One way you could reduce your tax bill would be to get your interest paid monthly as the first 8 months would count towards the 2022-23 tax year and the last 4 months would count towards the 2023-24 tax year. Assuming that the interest was compounded and paid into your fixed rate bond, this would generate £1444.17 interest in the first tax year. Using the same calculations as last time results in £88.83 in tax during the 2022-23 tax year. For the 2023-24 tax year you would generate £731.83 interest, which is below the personal tax allowance and thus tax free. This results in a saving of £146.37

For the purposes of these calculations I have assumed that the personal tax allowance remains at £1000 for both the 2022-23 tax year and for the 2023-24 tax year. I also assumed that the OP had no other savings and that the OP's income would remain the same throughout both tax years and also that the tax bands would not change during this period. I have also assumed that the first interest payment for the monthly interest would be paid in August 2022.

xylophone

You could use your ISA allowance.

You mention £12000 in ISA saved over many years.

How much in this tax year?

Mary_Alice

xylophone said:

You could use your ISA allowance.

You mention £12000 in ISA saved over many years.

How much in this tax year?

Only 260 this year so far due to all the expenses with sorting his estate out so I could top this up to the max £20,000 then save the rest in a Bond, I can get a better rate Bond if I fixed for 3 or 5 years but the building society said they rate will probably increase in Sept  so wit til then ,then it my increase again so  not to lock in a rate for the the 5 years.  so much to learn !!