Tax on Interest from Savings

Lu2025

My dad passed away suddenly in March and I have been trying to sort things out for my mum. She has the state government pension of £635 per month and a small private pension of £180 per month, so approximately £9780 per year.

My dad had shares so we sold them and she has approximately £80k. I opened up a Chase account for her and transferred £80k and she gets approximately £200 a month interest which is good. However, I have read that she would get £1000 in interest and then pay tax.

1) How much tax would she pay?
2) Does the bank take the tax out at the end of the year or does she have to fill in forms?
3) She also has an ISA should I put some of the money in that?

Thanks in advance

El_Torro

I'll let others comment further on the tax on interest, though based on how much interest she's getting and what her income is I don't think she will need to pay any tax on it. Might need to still declare it though.

Is this £80k working as hard as it should? By that I mean is your mum earning as much interest as she could? Even if investing some of the money isn't suitable it's worth looking at things like fixed term savings and monthly savers. 

She could put some money in a Cash ISA. She's likely to earn more interest outside of a Cash ISA though, and not pay tax on any of the interest.

Doctor_Who

Lu2025 said:

My dad passed away suddenly in March and I have been trying to sort things out for my mum. She has the state government pension of £635 per month and a small private pension of £180 per month, so approximately £9780 per year.

My dad had shares so we sold them and she has approximately £80k. I opened up a Chase account for her and transferred £80k and she gets approximately £200 a month interest which is good. However, I have read that she would get £1000 in interest and then pay tax.

1) How much tax would she pay?
2) Does the bank take the tax out at the end of the year or does she have to fill in forms?
3) She also has an ISA should I put some of the money in that?

Thanks in advance

She will have the remainder of her personal allowance (£12570-£9780) to use first, then £5000 of interest taxed @ 0% (the starter savings rate) and then £1000 of interest taxed @ 0% (PSA). That should be more than enough for ALL of her interest to be taxed at 0%, hence zero tax. In fact she'll not use all of her personal allowance, but the starter savings rate and PSA are available if she earns more interest (rates are going up).

The banks will inform HMRC, she doesn't need to do anything.

You probably don't need to add to the ISA since her savings interest is going to be covered by the personal allowance/starter savings rate/PSA.

Dazed_and_C0nfused

Lu2025 said:

My dad passed away suddenly in March and I have been trying to sort things out for my mum. She has the state government pension of £635 per month and a small private pension of £180 per month, so approximately £9780 per year.

My dad had shares so we sold them and she has approximately £80k. I opened up a Chase account for her and transferred £80k and she gets approximately £200 a month interest which is good. However, I have read that she would get £1000 in interest and then pay tax.

1) How much tax would she pay?
2) Does the bank take the tax out at the end of the year or does she have to fill in forms?
3) She also has an ISA should I put some of the money in that?

Thanks in advance

I suspect some of your figures are slightly wrong as no one can have State Pension paid monthly, it would be 4 weekly.

If she receives £635 each payment then that would be £8,255/year as she would get 13 payments.

Add on the private pension of £2,160* and that's £10,415 in non savings non dividend income.

The first £2,155 of interest would be covered by the unused Personal Allowance.

The next £5,000 would be taxed at 0% (savings starter rate band).

And only once that had been used could she make use of the savings nil rate band where another £1,000 is taxed at 0%.

1.  Nothing unless her interest was more than £8,155.

2.  Unless the interest £10,000 or more there is nothing she needs to do.  The bank reports the interest to HMRC and they check if any tax is due.

3.  If that would give the best post tax return then yes.  But it seems unlikely to be the best thing to do if she just has £80,000 in savings.

Lu2025

Thanks both, much appreciated.

Lu2025

Dazed_and_C0nfused said:

Lu2025 said:

My dad passed away suddenly in March and I have been trying to sort things out for my mum. She has the state government pension of £635 per month and a small private pension of £180 per month, so approximately £9780 per year.

My dad had shares so we sold them and she has approximately £80k. I opened up a Chase account for her and transferred £80k and she gets approximately £200 a month interest which is good. However, I have read that she would get £1000 in interest and then pay tax.

1) How much tax would she pay?
2) Does the bank take the tax out at the end of the year or does she have to fill in forms?
3) She also has an ISA should I put some of the money in that?

Thanks in advance

I suspect some of your figures are slightly wrong as no one can have State Pension paid monthly, it would be 4 weekly.

If she receives £635 each payment then that would be £8,255/year as she would get 13 payments.

Add on the private pension of £2,160* and that's £10,415 in non savings non dividend income.

The first £2,155 of interest would be covered by the unused Personal Allowance.

The next £5,000 would be taxed at 0% (savings starter rate band).

And only once that had been used could she make use of the savings nil rate band where another £1,000 is taxed at 0%.

1.  Nothing unless her interest was more than £8,155.

2.  Unless the interest £10,000 or more there is nothing she needs to do.  The bank reports the interest to HMRC and they check if any tax is due.

3.  If that would give the best post tax return then yes.  But it seems unlikely to be the best thing to do if she just has £80,000 in savings.

You are correct, it will be 13 payments, im forgetting that it will be 4 weekly. Thanks

Albermarle

Lu2025 said:

Thanks both, much appreciated.

Just worth mentioning there is lots of good guidance in other threads on the forum about saving rates/accounts/tax etc
So worth a read through at some point. Also from MSE website.
Tax-free savings: check if you're eligible - Money Saving Expert
Best savings accounts: 4.25% easy access or 5.95% fixed rates (moneysavingexpert.com)