Tax on Savings

Bigwheels1111

Alex9384 said:

Hi all!

Without reading through all the posts.. I'm on relatively low income of 25,000 per year (gross).
I'd like to deposit 23,000 savings to a fixed bond for 5 years, after which the balance will be around 30k. That means 7k profit. The Savings account I'm looking at doesn't pay out interest annually but instead compounds it and pays out at maturity. I have no other income. Should I expect to pay 20% tax on those 7k earned?

If I were you I would look at the next saving account in line. Scratch that Tandem wins.
Ive just checked and Tandem are at the top with 5.85% for 5 years and interest can be paid away each year.
To get an even better rate, get a referral from a Raisin account holder and then go via Raisin.
I think from a post yesterday you get a referral bonus and £25 for depositing 10k.
It takes 1 or 2 days to open and fund the account.
Twice this year it was next day.
Interest is £1345.50 - £1000 PSA = £ 345.50 - 20% tax at £61.90.
After tax £1276.40.

Tandem direct uses a phone or tablet app.
Raisin uses app or desktop. If your not an app fan.

select length 5 years and then rate order.

https://moneyfactscompare.co.uk/savings-accounts/fixed-rate-bonds/

Alex9384

Bigwheels1111 said:

If I were you I would look at the next saving account in line. Scratch that Tandem wins.
Ive just checked and Tandem are at the top with 5.85% for 5 years and interest can be paid away each year.
To get an even better rate, get a referral from a Raisin account holder and then go via Raisin.
I think from a post yesterday you get a referral bonus and £25 for depositing 10k.
It takes 1 or 2 days to open and fund the account.
Twice this year it was next day.
Interest is £1345.50 - £1000 PSA = £ 345.50 - 20% tax at £61.90.
After tax £1276.40.

Tandem direct uses a phone or tablet app.
Raisin uses app or desktop. If your not an app fan.

select length 5 years and then rate order.

https://moneyfactscompare.co.uk/savings-accounts/fixed-rate-bonds/

Thanks! Tandem would be much easier for me since I already have it. I've been holding all the money in Tandem Easy Access for a few months now. So it would be super easy to just open their 5 year saver and transfer it within the app.
The only thing is that I wouldn't reach the "magical" 30k at maturity, since the interest at Tandem is not compounding but rather paid out annually.

Alex9384

Dazed_and_C0nfused said:

Ultimately it depends on how the interest payer reports the interest.

If it credited to your account each year then it's likely to be reported like that to HMRC.

In which case the first £1,000 would be taxed at 0% and the remainder at 20%.

So say you got £1,400 in year 1 that would leave you with £80 tax to pay.

Cheers!
So, which option is actually more tax efficient for someone like me? Interest paid out annually, like Tandem does? Or compounded and then paid out in one payment after 5 years like for example United Trust Bank?

Dazed_and_C0nfused

Alex9384 said:

Dazed_and_C0nfused said:

Ultimately it depends on how the interest payer reports the interest.

If it credited to your account each year then it's likely to be reported like that to HMRC.

In which case the first £1,000 would be taxed at 0% and the remainder at 20%.

So say you got £1,400 in year 1 that would leave you with £80 tax to pay.

Cheers!
So, which option is actually more tax efficient for someone like me? Interest paid out annually, like Tandem does? Or compounded and then paid out in one payment after 5 years like for example United Trust Bank?

Compounded is usually best but if it was all reported as taxable in the final year then instead of paying ~£80/year each year for 5 years (£400) you would be taxed on £7,000 all in one go.

Assuming £1,000 still taxed at 0% that leaves £6,000 at 20% = £1,200.

Three times the tax if the interest was reported annually.

Doctor_Who

Alex9384 said:

Dazed_and_C0nfused said:

Ultimately it depends on how the interest payer reports the interest.

If it credited to your account each year then it's likely to be reported like that to HMRC.

In which case the first £1,000 would be taxed at 0% and the remainder at 20%.

So say you got £1,400 in year 1 that would leave you with £80 tax to pay.

Cheers!
So, which option is actually more tax efficient for someone like me? Interest paid out annually, like Tandem does? Or compounded and then paid out in one payment after 5 years like for example United Trust Bank?

I would go for annual interest so that you use the £1000 PSA (taxed at 0%) each year. If all the interest is paid in year 5 then you only have a single £1000 PSA to use in that year.

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/#interest

fuzzzzy

I've recently been getting flummoxed over this same issue.

I went for a United Trust Bank 5 year fix at 5.8%. I asked for the interest to be compounded annually but think I may need to change that. Before I opened the account I rang up to check if I could change my options to have interest paid away part way through the fixed period. I was told that I could phone up and do this anytime.

The greedy side of me wants to leave it to compound but still report it to HMRC annually, based on the reasoning that the interest is accessible as I can change my option at any time to have it paid out during the fixed rate term but I am choosing each year to have it compounded.

The sensible side of me worries that because this is a grey area I should just play it safe and get the interest paid away.

I think I need to do a bit more research.

wmb194

fuzzzzy said:

I've recently been getting flummoxed over this same issue.

I went for a United Trust Bank 5 year fix at 5.8%. I asked for the interest to be compounded annually but think I may need to change that. Before I opened the account I rang up to check if I could change my options to have interest paid away part way through the fixed period. I was told that I could phone up and do this anytime.

The greedy side of me wants to leave it to compound but still report it to HMRC annually, based on the reasoning that the interest is accessible as I can change my option at any time to have it paid out during the fixed rate term but I am choosing each year to have it compounded.

The sensible side of me worries that because this is a grey area I should just play it safe and get the interest paid away.

I think I need to do a bit more research.

You can still compound the interest when it's paid away it's just that you'll have to do it in another account and it may be at a higher or lower interest rate or you could e.g., invest it in the stockmarket.

fuzzzzy

wmb194 said:

fuzzzzy said:

I've recently been getting flummoxed over this same issue.

I went for a United Trust Bank 5 year fix at 5.8%. I asked for the interest to be compounded annually but think I may need to change that. Before I opened the account I rang up to check if I could change my options to have interest paid away part way through the fixed period. I was told that I could phone up and do this anytime.

The greedy side of me wants to leave it to compound but still report it to HMRC annually, based on the reasoning that the interest is accessible as I can change my option at any time to have it paid out during the fixed rate term but I am choosing each year to have it compounded.

The sensible side of me worries that because this is a grey area I should just play it safe and get the interest paid away.

I think I need to do a bit more research.

You can still compound the interest when it's paid away it's just that you'll have to do it in another account and it may be at a higher or lower interest rate or you could e.g., invest it in the stockmarket.

Very true. I suppose I was assuming that interest rates will go down and so compounding would be the best option, but who knows. I may just get it paid away and forget the whole dilemma of how to report the interest.