Confused about Tax allowance on savings

Bridlington1

Mary_Alice said:

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 !!

I am assuming the ISA is a cash ISA here. If the interest rate on the ISA is more than 20% lower than the interest rate of the fixed rate bond then you are better off going for the bond as you would earn more interest post tax in the bond than you would in the ISA. By my calculations, assuming the bond pays 2.72%, if the interest rate on the ISA is between 2.176% and 2.72% then put as much of the £80k into the bond as possible without going over the personal tax allowance, then stick the rest in the ISA. If the ISA is less than 2.176% then do not bother with the ISA as you will earn more interest in the bond post tax. 

Albermarle

Mary_Alice said:

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 !!

Most people 'in the know' are limiting any fixed rate savings bonds to one year or even 6 months, as at least one more increase in savings rates is expected in the not too distant future. Nobody knows for sure though.

As a more general rule 5 years is a long time to tie your savings up. It might work out and it might not, a lot can happen in 5 years. If you can lock away money for 5 years or more, then you may want to consider investing some of the money. If you think you will not need some of the money for 10 years or more, then you should probably be thinking along these lines.

 I will soon have around £80,000 inheritance to put somewhere safe.
To want to put it somewhere 'safe' is perfectly understandable. However although savings accounts are safe, they do not protect your money against inflation very well.
For example if you save today £80K at 2 % interest then in 12 months time, it will be £81,600 . However with inflation at 9% it will only be worth ( in terms of what it can buy) £74,250 . Even if the gap between savings interest and inflation is less, over many years it will cause a significant drop in the value of what you have inherited.

By all means get it put away in savings account for now, but keep in mind for the long term that some kind of investment or pension would probably be a better place for some of it at least.

You do not mention your age but one very important to check now is will you be entitled to a full state pension?
You can check here Check your State Pension forecast - GOV.UK (www.gov.uk)

EthicsGradient

Mary_Alice said:

  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. 

It doesn't look like anyone has addressed this. 

https://www.gov.uk/apply-tax-free-interest-on-savings

If you already fill in a Self Assessment form, then there's a section on interest where you report it. If you don't, then:

"If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year."

The bank (or whatever) will tell HMRC how much interest they pay you in the 22-23 tax year (if you get monthly interest), and then your 23-24 tax code will be changed slightly if you owe anything, so that you effectively pay it in the next year. There should not be any need for you to do anything.

redpete

EthicsGradient said:

Mary_Alice said:

  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. 

It doesn't look like anyone has addressed this. 

https://www.gov.uk/apply-tax-free-interest-on-savings

If you already fill in a Self Assessment form, then there's a section on interest where you report it. If you don't, then:

"If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year."

The bank (or whatever) will tell HMRC how much interest they pay you in the 22-23 tax year (if you get monthly interest), and then your 23-24 tax code will be changed slightly if you owe anything, so that you effectively pay it in the next year. There should not be any need for you to do anything.

I'm not sure that's what it means.  It says they estimate how much interest you might earn next year based on what you earned this year, they adjust your tax code so that next year you actually pay tax on this estimated interest earlier than if they wait until you report it via SA submissions.  I'd expect them to send you a bill for this year's interest tax as soon as they've processed the info from your bank etc.  (I might have it wrong though, and if so I'm sure it will be corrected!)

JGB1955

The easiest thing is to fill in a self-assessment tax form.  2 minutes later you know your liability for the previous year.... and pay it by 31 January.

Dazed_and_C0nfused

EthicsGradient said:

Mary_Alice said:

  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. 

It doesn't look like anyone has addressed this. 

https://www.gov.uk/apply-tax-free-interest-on-savings

If you already fill in a Self Assessment form, then there's a section on interest where you report it. If you don't, then:

"If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year."

The bank (or whatever) will tell HMRC how much interest they pay you in the 22-23 tax year (if you get monthly interest), and then your 23-24 tax code will be changed slightly if you owe anything, so that you effectively pay it in the next year. There should not be any need for you to do anything.

That isn't the cycle of how the tax is paid.

Using your example of tax paid in 2022:23 then the adjustment to the 2023:24 tax code would only be to start collecting additional tax for 2023:24, not to start collecting the tax owed for 2022:23.

The tax owed for 2022:23 would be collected via the 2024:25 tax code.  Or by direct payment to HMRC by 31 January 2024 if it couldn't be collected via the 2024:25 tax code (shouldn't be an issue for the op)

EthicsGradient

redpete said:

EthicsGradient said:

Mary_Alice said:

  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. 

It doesn't look like anyone has addressed this. 

https://www.gov.uk/apply-tax-free-interest-on-savings

If you already fill in a Self Assessment form, then there's a section on interest where you report it. If you don't, then:

"If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year."

The bank (or whatever) will tell HMRC how much interest they pay you in the 22-23 tax year (if you get monthly interest), and then your 23-24 tax code will be changed slightly if you owe anything, so that you effectively pay it in the next year. There should not be any need for you to do anything.

I'm not sure that's what it means.  It says they estimate how much interest you might earn next year based on what you earned this year, they adjust your tax code so that next year you actually pay tax on this estimated interest earlier than if they wait until you report it via SA submissions.  I'd expect them to send you a bill for this year's interest tax as soon as they've processed the info from your bank etc.  (I might have it wrong though, and if so I'm sure it will be corrected!)

Well, it does say "HMRC will change your tax code so you pay the tax automatically", not "HMRC will send you a bill". I admit I do self-assessment, and have done from before the current system with the £1,000 savings allowance came in, so I haven't experienced this myself (which is why I waited for someone else to say it, but it appears no-one here gets over £1,000 interest and is either employed or in receipt of pensions over £18,000 or so, without doing self-assessment). But I can't get "HMRC will send you a bill" out of their explanation. What it would mean is that in a year when your interest decreases, you'd still have the lower code which causes you to pay the tax owed in the previous year.

And obviously it's simpler to not fill in a self-assessment form than to do so.

eskbanker

Mary_Alice said:

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 

In which case worrying about paying bills/mortgage etc would seem to have been wholly unnecessary, many would be thrilled to be in that situation!  Anyway, in terms of the £80K inheritance, simply putting it in any institution other than the one holding your ISA will suffice, so you still don't need to split it (the inheritance) for the FSCS protection....

Albermarle

JGB1955 said:

The easiest thing is to fill in a self-assessment tax form.  2 minutes later you know your liability for the previous year.... and pay it by 31 January.

HMRC will only let you self assess if you pass certain criteria. They seem to be on a drive to reduce SA to cut down admin costs, and they prefer you to use your on line personal tax account.

Bigwheels1111

I would not fix for more than 6 months at this moment in time as there should be a lot of rises in the pipeline.
The tax is an issue, but after paying tax you will still get better returns than an isa.

I don’t need to worry about tax, unless I get more then 15k interest a year.
So I’m ditching isa savings due to rates.
I want maximum interest for 5 years paid annually.
I would expect after 4 more boe base rate rises before the new year 4.5% should be around.
I have 3 to 4 large pots reaching maturity in the next 6 months, will be sticking them in easy access or notice accounts for fast access.
Awaiting better rates.
Don’t need the money for 5 years or more.
Plus keeping 20k emergency fund to hand just in case.
A 8k-12k income for 5 years would be nice. As my current job only pays £0.41p per hour.