Tax on savings interest

roadweary

Hi,

I'm trying to pay down a chunk of my mortgage in January when the fixed rate comes to an end.

Between premium bonds and savings I have around 50k I can put into an account.

Shawbrook have 4.27% with interest paid monthly....which equates to over £800 in interest by January.

However, I am in the higher tax bracket.  I thought you got £1,000 of interest free from savings...but looking at my self-assessment calculation, it looks like they have included that in my total income for the year.

I'm trying to understand, because I could give the money to my wife, who is in the lower tax bracket, and have her open the savings account.

In both cases, I'm not clear how HMRC will treat the interest from savings.

Can anyone else help please?

For info - my savings interest last year was £33 and hers was zero....

Thanks,
R

Doctor_Who

roadweary said:

Hi,

I'm trying to pay down a chunk of my mortgage in January when the fixed rate comes to an end.

Between premium bonds and savings I have around 50k I can put into an account.

Shawbrook have 4.27% with interest paid monthly....which equates to over £800 in interest by January.

However, I am in the higher tax bracket.  I thought you got £1,000 of interest free from savings...but looking at my self-assessment calculation, it looks like they have included that in my total income for the year.

I'm trying to understand, because I could give the money to my wife, who is in the lower tax bracket, and have her open the savings account.

In both cases, I'm not clear how HMRC will treat the interest from savings.

Can anyone else help please?

For info - my savings interest last year was £33 and hers was zero....

Thanks,
R

As a higher rate tax payer you are only entitled to £500 personal savings allowance (£500 interest taxed at 0%), your wife being a basic rate tax payer is entitled to £1000 personal savings allowance (£1000 interest taxed at 0%). She could open an account and deposit the whole £50K or you could both open accounts and split the £50K. Or you could leave the premium bonds alone until January (they are tax free). The savings provider (e.g. Shawbrook) will report interest earned to HMRC.

Dazed_and_C0nfused

roadweary said:

Hi,

I'm trying to pay down a chunk of my mortgage in January when the fixed rate comes to an end.

Between premium bonds and savings I have around 50k I can put into an account.

Shawbrook have 4.27% with interest paid monthly....which equates to over £800 in interest by January.

However, I am in the higher tax bracket.  I thought you got £1,000 of interest free from savings...but looking at my self-assessment calculation, it looks like they have included that in my total income for the year.

I'm trying to understand, because I could give the money to my wife, who is in the lower tax bracket, and have her open the savings account.

In both cases, I'm not clear how HMRC will treat the interest from savings.

Can anyone else help please?

For info - my savings interest last year was £33 and hers was zero....

Thanks,
R

Unless it's from an ISA it will be taxable income, it's not tax free.

From what you've posted the first £500 will be taxed at 0% and then the remainder at 40%.

As it forms part of your adjusted net income it could mean HICBC is due (or is increased) or it reduces your Personal Allowance.

Scot_39

roadweary said:

Hi,

I'm trying to pay down a chunk of my mortgage in January when the fixed rate comes to an end.

Between premium bonds and savings I have around 50k I can put into an account.

Shawbrook have 4.27% with interest paid monthly....which equates to over £800 in interest by January.

However, I am in the higher tax bracket.  I thought you got £1,000 of interest free from savings...but looking at my self-assessment calculation, it looks like they have included that in my total income for the year.

I'm trying to understand, because I could give the money to my wife, who is in the lower tax bracket, and have her open the savings account.

In both cases, I'm not clear how HMRC will treat the interest from savings.

Can anyone else help please?

For info - my savings interest last year was £33 and hers was zero....

Thanks,
R

Taxation in the UK is on an individual basis.

There is no joint filing for couples as in likes of USA.

The actual treatment of tax on interest

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

The banks in UK now almost exclusively pay all interest gross - and notify the HMRC on your behalf.  

If do self assessment returns - you will also need to declare. 

If not the HMRC do an automatic guesstimate and adjust tax codes or bill you. 

It is probably worth checking your personal tax account has up to date interest and personal pension amounts etc. I seem to remember it taking a while to correct after receiving a tax notice based on out of date figures.

Right Now

The transfer of money - between spouses - and largish tax savings that can occur over time - is one of the many arguably anachronisms of the tax system - I suspect in part based on the outdated presumption of one income households - for which even the Marriage allowance exists - but of much lower relative worth than of old. 

And whilst they exist - it would seem wise for those who can to make use of it.  And many have and will continue to do.

As your wife works - depending on income there are limits.

But many ways couples can and do gain advantages include taking advantage of the PSA, the £5000 starter rate for low earners on savings as well as any spouses own unused IT PA - so £18750 total tax free if income below PA - if haven't taken adavantage of MA ?

the individual £20000 ISA limit itself

the £2880 pension contribution etc etc.

And the best instant access ISA now paying 4.15% / 4.07% monthly if withdraw (or it compounds if don't) - without any tax liability - if you and the wife haven't used your full 20k subscription allowance this year.  Could ease the tax exposure.

OR leave whats in premium bonds or top upto 50k limit - they are also tax free - albeit no guaranteed returns - and even "average" "luck" is still notably below the soon to be 4% prize rate.

But putting money in the wifes name is definitely perfectly normal - so if thats the simplest option do so.  Even in a joint account - 50% of interest would be deemed hers.

And if you feel uneasy that that is somehow cheating the tax man - you could potentialy just pay off a component of the mortgage using some of the 50k now - ignoring the interest rate differential - as many fixes still allow say 10%(*) of initial loan repayment per year (*Nationwide's fix terms iirc) - penalty free.

Albermarle

It is probably worth checking your personal tax account has up to date interest and personal pension amounts etc. I seem to remember it taking a while to correct after receiving a tax notice based on out of date figures.

AFAIK, it is difficult to see what interest is recorded on your personal tax account (a weakness in the HMRC system) . In any case the millions of interest notifications sent by providers will take some time to get uploaded.

Scot_39

Thanks

I admit haven't checked my own for a while - my last contract ran out during covid - and when I did look in early years - it was only really to see how it compared to self assessment submissions.

You could well be right that interest isn't there - it's been a while since looked for it - as the PSA made it pretty much irrelevent - but did used to update the personal pensions contributions, non standard expense allowances figures at one stage.   Been a couple of years since last got a personal account statement / tax calc / revised coding notice.

My tax affairs are a lot simpler these days.

Tend to only be checking my state pension forecasts when log in to the gov site these days.