income tax on interest from savings

tina_martin_2

my husband and I are selling our house to move into a rented property. we will be putting around £120,000.00 in the bank to earn monthly interest as an additional income.
can you tell me how much income tax we will have to pay on the interest we earn from our capital. we are both in empoyment earning over our taxable allowances.
1. is it classed as unearned income and automatically set at a higher taxable rate?
or
2. is it added to our wages and classed as additional income which is subject to normal taxable rates ? if so - what are the income thresholds for the higher rates of income tax?

CLAPTON

Unearned income (like interest) is 'added' to your other income and taxed at 10%, 20% or 40% depending..

so if you are already a 22% tax payer your will pay 20% between your current gross salary and 39825 and then 40% on anything over.

You should both use your ISA allowances and split the money between you both to minimise tax.
You can add to the ISA after 6th april 2008.

tina_martin_2

thanks clapton - this answers my question perfectly.
we had planned to put all the money into 3 alliance and leicester direct savings accounts - currently at 6.3%
100,000.00 in a joint account which we will not touch for several years
and 10,000.00 each in individual accounts - which we may wish to withdraw over the coming year or two.

i had not thought about isa`s - would this give a greater return of interest for our money?

FBThree

You may want to consider some other fixed rate accounts if you know you aren't going to touch the money for a few years! Even if you only fix for 6 months, and then re-think the money later you may find a better rate of interest.

CLAPTON

The point about ISAs is that you pay no tax so even an ISA at 6% with no tax is much better that a taxed saving a/c at 6.3%.
If you have to pay tax 6.3% is only worth 5.04% at 20% tax or 3.78% if you pay tax at 40%.

For longer term savings (i.e 3 years ) you may wish to consider Governement Index Linked certificate.

ipri

Clapton....from your comments about tax on savings interest....Is interest on savings lumped in with all other earnings and then subject to the appropriate tax banding??...also..you mention £39825 as the 40% band...I thought from other postings that it was £34,600?? Ta Ian


PS just to clarify...other postings suggest that interest on savings is set at 10% tax...??

CLAPTON

ipri wrote: »

Clapton....from your comments about tax on savings interest....Is interest on savings lumped in with all other earnings and then subject to the appropriate tax banding??...also..you mention £39825 as the 40% band...I thought from other postings that it was £34,600?? Ta Ian


PS just to clarify...other postings suggest that interest on savings is set at 10% tax...??

yes it added to your earned income and then taxed at 10%, 20% (not 22%) or 40% as appropriate

tax works as follows for earned income

5,225 tax free
2,230 at 10%
32,370 at 22%

so you pay 40% once you have taxable income above
39,825 (changed from 39,370 as corrected by jem16 next post.)... people often forget to add the 5225 tax free

jem16

CLAPTON wrote: »

so you pay 40% once you have taxable income above
39,370... people often forget to add the 5225 tax free

It's £39,825 - £34,600 + £5225.

ipri

Great help...somewhat confused by jem16 post??...also what about married couples..is this 2x £5225?? Ian

jem16

The 40% band starts at taxable income of £34,600. Add to this the personal allowance of £5225 and you get £39,825 of earned income before you start to pay 40% tax.

Tax is personal and each person has his/her own allowances. Being married makes no difference now. There used to be a married man's allowance and still is but you need to be around 70 or older to still have this.

jem16

ipri wrote: »

PS just to clarify...other postings suggest that interest on savings is set at 10% tax...??

Interest on savings is taxed at 20% from source - in other words when you get your interest from the bank it will alreay have 20% tax taken from it.

However if you are a higher rate taxpayer you will have a further 20% tax to pay and this will be done through your tax return.

At the moment those earning £5225 but less than £7455 should only pay tax at 10% on their savings and can apply for a refund.

Anyone earning £5225 or less can apply for gross interest to be paid.