Tax on savings

Lynsey89

Just looking for some advice as I can’t get my head around the personal allowance.

So I have around £204k in savings and I earn about £13k in employment.

Will I pay tax on any interest accrued from my savings? I can’t understand about the £1000 but then it mentions £5000 allowance.

Im just trying to decide if I should reopen an ISA if I will be paying tax on my savings.
Thanks

Dazed_and_C0nfused

The £1,000 isn't something low earners can usually make any use of.

But you may be able to with that level of savings.

Any taxable earnings or pension which uses up your basic rate band also uses some of the savings starter rate (upto £5,000 taxed at 0%).  So on £13,000 you will pay basic rate tax on £430 meaning your savings starter rate band is reduced from £5,000 to £4,570.

So let's say you get £6,000 in interest it would be taxed like this,

£4,570 x 0% (savings starter rate) = £0
£1,000 x 0% (savings nil rate) = £0
£430 x 20% (savings basic rate) = £86

Total tax due on savings interest = £86 

All the above assumes you haven't applied for Marriage Allowance.  If you have it will reduce the savings starter rate band available to you.

eskbanker

Lynsey89 said:

So I have around £204k in savings

[...]

Im just trying to decide if I should reopen an ISA if I will be paying tax on my savings.

You'd only be able to get £20K into an ISA anyway, but, as ever, it'll be best to consider best net return, i.e. cash ISAs aren't necessarily worth using if they pay less than 80% of a taxable rate.

A S&S ISA might be worth investigating unless you have that whole pot earmarked for something in the foreseeable future....

mooneysaver

eskbanker said:

Lynsey89 said:

So I have around £204k in savings

[...]

Im just trying to decide if I should reopen an ISA if I will be paying tax on my savings.

You'd only be able to get £20K into an ISA anyway, but, as ever, it'll be best to consider best net return, i.e. cash ISAs aren't necessarily worth using if they pay less than 80% of a taxable rate.

A S&S ISA might be worth investigating unless you have that whole pot earmarked for something in the foreseeable future....

Unfortunatelyyou won't find any cash ISAs paying anywhere near 80% at the moment. You're looking at closer to 1.5% or 3% for a fix.

Dazed_and_C0nfused

mooneysaver said:

eskbanker said:

Lynsey89 said:

So I have around £204k in savings

[...]

Im just trying to decide if I should reopen an ISA if I will be paying tax on my savings.

You'd only be able to get £20K into an ISA anyway, but, as ever, it'll be best to consider best net return, i.e. cash ISAs aren't necessarily worth using if they pay less than 80% of a taxable rate.

A S&S ISA might be worth investigating unless you have that whole pot earmarked for something in the foreseeable future....

Unfortunatelyyou won't find any cash ISAs paying anywhere near 80% at the moment. You're looking at closer to 1.5% or 3% for a fix.

It's 80% of the non ISA rate, not an interest rate of 80% 😀.

So 3% one year fixed rate ISA might be preferable for some people compared to a 3.2% taxable fixed rate account.

If basic rate tax was payable on all of the interest from a 3.2% account it would effectively be 2.56% after tax.

Rudyson

Dazed_and_C0nfused said:

The £1,000 isn't something low earners can usually make any use of.

But you may be able to with that level of savings.

Any taxable earnings or pension which uses up your basic rate band also uses some of the savings starter rate (upto £5,000 taxed at 0%).  So on £13,000 you will pay basic rate tax on £430 meaning your savings starter rate band is reduced from £5,000 to £4,570.

So let's say you get £6,000 in interest it would be taxed like this,

£4,570 x 0% (savings starter rate) = £0
£1,000 x 0% (savings nil rate) = £0
£430 x 20% (savings basic rate) = £86

Total tax due on savings interest = £86 

All the above assumes you haven't applied for Marriage Allowance.  If you have it will reduce the savings starter rate band available to you.

Very interesting as this will apply to me as well. I'm on a state pension and draw down from a private pension pot an amount that keeps me under the £12,570 tax threshold. Next year, I'll be getting over £1000 in interest, so I assumed I'd have to pay tax or reduce the drawdown: are you saying I have an extra £5k leeway in interest before I pay anything?

Exodi

mooneysaver said:

eskbanker said:

Lynsey89 said:

So I have around £204k in savings

[...]

Im just trying to decide if I should reopen an ISA if I will be paying tax on my savings.

You'd only be able to get £20K into an ISA anyway, but, as ever, it'll be best to consider best net return, i.e. cash ISAs aren't necessarily worth using if they pay less than 80% of a taxable rate.

A S&S ISA might be worth investigating unless you have that whole pot earmarked for something in the foreseeable future....

Unfortunatelyyou won't find any cash ISAs paying anywhere near 80% at the moment. You're looking at closer to 1.5% or 3% for a fix.

Hahahahaha, doh - my plan to buy Liverpool FC in 30 years by putting £100 in a Cash ISA now are in ruins!

Malthusian

Rudyson said:

Very interesting as this will apply to me as well. I'm on a state pension and draw down from a private pension pot an amount that keeps me under the £12,570 tax threshold. Next year, I'll be getting over £1000 in interest, so I assumed I'd have to pay tax or reduce the drawdown: are you saying I have an extra £5k leeway in interest before I pay anything?

Correct. You can draw enough drawdown income to take you up to £12,570. The interest will then sit on top of that in the starter rate bracket, and no tax will be payable (if it's under £5,000).

where_are_we

Rudyson said:

Dazed_and_C0nfused said:

The £1,000 isn't something low earners can usually make any use of.

But you may be able to with that level of savings.

Any taxable earnings or pension which uses up your basic rate band also uses some of the savings starter rate (upto £5,000 taxed at 0%).  So on £13,000 you will pay basic rate tax on £430 meaning your savings starter rate band is reduced from £5,000 to £4,570.

So let's say you get £6,000 in interest it would be taxed like this,

£4,570 x 0% (savings starter rate) = £0
£1,000 x 0% (savings nil rate) = £0
£430 x 20% (savings basic rate) = £86

Total tax due on savings interest = £86 

All the above assumes you haven't applied for Marriage Allowance.  If you have it will reduce the savings starter rate band available to you.

Very interesting as this will apply to me as well. I'm on a state pension and draw down from a private pension pot an amount that keeps me under the £12,570 tax threshold. Next year, I'll be getting over £1000 in interest, so I assumed I'd have to pay tax or reduce the drawdown: are you saying I have an extra £5k leeway in interest before I pay anything?

Yes.If you keep your income from pensions below £12570 this tax year you will benefit from both the starter savings rate of 0% tax on £5000 interest and the personal savings allowance of £1000 of savings interest before you pay tax.

where_are_we

I had to call Santander recently because they stopped a large payment by me to my OH`s savings account for security reasons. I really didn`t need to justify the reason for transferring this money, but I thought I would explain, that because my OH, as a non taxpayer, benefited from the starter savings rate of 0% tax on first £5000 and I didn`t, it was to our mutual advantage to put most of our cash savings with my OH. I was amazed that he had never heard of the starter savings rate, and implied we were benefiting from a tax loophole!

eskbanker

where_are_we said:

I was amazed that he had never heard of the starter savings rate

Doesn't seem surprising to me that a call centre employee engaged to deal with current account issues won't be an expert on the ins and outs of taxation (which form no part of his remit and responsibility)!