How to tell if you'll need to pay tax on interest?

martyp

Hi all,

I'm looking into putting my £300 mortgage overpayments into savings to pay off a bigger chunk with the extra interest gained at the end of my 5 year fix (1.49% mortgage vs 4-5% savings interest).

Paying £300 into savings each month for say 4 years to the end of the fix would likely accrue a fair bit of interest I'd imagine.

I just worry about how much savings interest can be gained before paying tax on it and if taxed would it be deducted automatically? I'm on the lower tax band.

Bigwheels1111

Keep it simple.
£12,570 of earnings or Interest is tax free.
£ 5,000 starter rate for interest is tax free, if you earned £3000 then only £2000 is tax free.
£ 1,000 PSA tax free.

My example is.
£ 4,010  taxable earnings 
£12,500 interest
£16,510 tax free earnings and interest. I will need to fill out a tax return.
£ 2,260 spare.

eskbanker

martyp said:

I'm looking into putting my £300 mortgage overpayments into savings to pay off a bigger chunk with the extra interest gained at the end of my 5 year fix (1.49% mortgage vs 4-5% savings interest).

Paying £300 into savings each month for say 4 years to the end of the fix would likely accrue a fair bit of interest I'd imagine.

After four years of £300pm, you'd still only be at less than £15K, which would earn £750pa at 5%, so comfortably within the £1K personal savings allowance and so no tax, unless you were very close to the higher rate threshold.

You might run into issues if you used multiple multi-year fixed accounts only paying interest at maturity but that should be easily avoidable.

martyp

Excellent, thanks. I was wary as I have money in other accounts earning interest of around £15-20 a month at present in total.

eskbanker

martyp said:

Excellent, thanks. I was wary as I have money in other accounts earning interest of around £15-20 a month at present in total.

It would have been worth mentioning that up front but you should still be OK, albeit with significantly less headroom - the key figure is £1K worth of annual savings interest (based on current legislation of course), but who knows what interest rates will be doing in several years' time....

martyp

Sorry yes, thanks for the info. I'll keep in mind to stay under the £1k point.

Zerforax

And its £500 personal allowance if you are a higher rate tax payer I think?

Dazed_and_C0nfused

Zerforax said:

And its £500 personal allowance if you are a higher rate tax payer I think?

£500 savings nil rate band (0% tax rate) for higher rate payers.  Although having the £500 taxed at 0% can actually mean someone classed as higher rate for savings interest purposes then doesn't pay any higher rate tax.

And could in turn be eligible for Marriage Allowance 😉

eskbanker

martyp said:

Sorry yes, thanks for the info. I'll keep in mind to stay under the £1k point.

Not sure what actions you'd have in mind to achieve that but there's no need to make a conscious effort to stay under £1K as such - the best approach is generally to maximise net return rather than trying to avoid paying tax, so earning, say, £1,200 in gross interest and paying £40 tax is obviously a better outcome than only earning £1,000 in gross interest!  If it looks like your interest income will approach £1K then it makes sense to evaluate how best to optimise your return, but don't assume that entails avoiding tax....

martyp

Excellent, thanks. Sorry how would the tax be taken? I want to avoid getting into trouble if I'm meant to declare it somehow as it would be across multiple savings accounts

eskbanker

martyp said:

Excellent, thanks. Sorry how would the tax be taken? I want to avoid getting into trouble if I'm meant to declare it somehow as it would be across multiple savings accounts

All the banks and building societies report the annual interest to HMRC, who can then determine if there is any incremental tax liability, and if there is then they'll adjust your PAYE tax code to collect it.