How pay minimum tax on savings.

Aaftab

Hi. I’ve been saving a deposit to purchase a house. I have £20000 in an ISA and the rest in an instant access account paying 3.2% interest. What are the best options to decease my tax on the savings? Or is it better to just pay the tax and earn the interest?

Dazed_and_C0nfused

It's best to get the maximum interest after factoring in tax.

For a basic rate payer 4% taxable interest is better than 3% from an ISA as the 4% is 3.2% net of tax.

TheBanker

It depends on your individual circumstances.

If you are a basic rate taxpayer you are able to earn £1,000 per year in savings (non-ISA) interest without paying tax. If you're a higher rate tax payer this drops to £500. So if you are within the limits you don't necessarily need to use an ISA and you can normally get slightly better rates using non-ISA accounts. If you are going to breach the limit then as the poster above says you need to look at whether the net (after tax) interest from the non-ISA will still be worth more than the gross (no tax) interest from the ISA. This depends on the difference in interest rates.

A few people are starting to get caught out by tax on savings. For many years when rates were typically <0.5% you needed a huge balance to earn £1,000 a year in interest. As rates have risen, more people are being caught. I think this is why ISAs are starting to become more popular again with a lot of banks promoting them at this time of year. 

The other benefit of an ISA is that once the money is in, the interest is tax free for ever. So if you're likely to become a higher rate tax payer in future it can make sense to secure your ISA allowance each year. This probably doesn't apply to you as presumably you will be spending the money relatively soon on your house. 

Also, remember that the bank will pay interest gross (without tax), even if it's not an ISA. They report the interest to HMRC, who will collect the tax through your PAYE tax deductions. So if you're looking at the amount of interest paid, remember you will be charged the 20% (or 40% if higher rate taxpayer) at a future date. 

Choirgrl

In addition to what the others have said , if an ISA is the better option for you then you’ll be able to put another £20k into one in a few days when the next tax year begins.

lohr500

Depending on your age, if you are a 1st time buyer and don't plan to buy a house for another year, you could consider a LISA. 

https://www.moneysavingexpert.com/savings/lifetime-isas/

You need to study the rules carefully to decide if a LISA would work for you.

The maximum you could put in for the new tax year is £4000, but the Govt will add 25% of whatever you contribute and it is tax free. It does count towards your £20k total ISA allowance, but the 25% Govt contribution will beat any available cash savings investment!! Plus you get conventional tax free interest on the LISA. MSE Top Pick is Moneybox who are currently offering 3.5% on their LISA. 


 

Flugelhorn

put it in an account paying 1% interest then you hardly pay any tax at all.

seriously you are always better to earn more interest and pay the tax, they won't tax more than you get. 

Albermarle

Or is it better to just pay the tax and earn the interest

Better to have 80% of something, than 100% of nothing !

TiVo_Lad

Dazed_and_C0nfused said:

It's best to get the maximum interest after factoring in tax.

For a basic rate payer 4% taxable interest is better than 3% from an ISA as the 4% is 3.2% net of tax.

Not forgetting that Income Tax rates and thresholds are different if the OP is a Scottish taxpayer....

Dazed_and_C0nfused

Tax rates on interest aren't different for Scottish (or Welsh) taxpayers.

The respective governments have no power of setting of the rates for income from interest (or dividends) so although you might become higher rate payer sooner the tax rates on the interest itself remain the same throughout the UK.

0, 0, 20, 40 and 45%.

VXman

Aaftab said:

What are the best options to decease my tax on the savings? 

 Put it into an investment account? Riskier but you can make profits of up to £12300 before capital gains tax kicks in.

Dazed_and_C0nfused

VXman said:

Aaftab said:

What are the best options to decease my tax on the savings? 

 Put it into an investment account? Riskier but you can make profits of up to £12300 before capital gains tax kicks in.

I don't think many people investing money today will be able to use the £12,300.

It drops to £6,000 on 6 April 😳