Do I need to pay tax on savings interest?

Wotulookinat

Following the recent sale of an inheritance property I have deposited around £70k in a high interest savings account, earning around 5%. My current income is my full state pension plus a small amount I take from my SIPP to take me up to the tax threshold of £12570. 

The remainder of the inheritance money (£200k) is now invested in stocks and shares which I know will have a capital gains liability, but only when I sell (I think). I also have a sizeable amount in a S&S ISA which I have built up over the years and which provides me with additional income.

Am I right in assuming that my taxable income is just £12570 and therefore I can earn up to £5000 in savings interest before paying tax? I presume the additional income I take from my ISA is outside the realm of tax calculations so doesn't need to be taken into account.

Thanks

Dazed_and_C0nfused

Wotulookinat said:

Following the recent sale of an inheritance property I have deposited around £70k in a high interest savings account, earning around 5%. My current income is my full state pension plus a small amount I take from my SIPP to take me up to the tax threshold of £12570. 

The remainder of the inheritance money (£200k) is now invested in stocks and shares which I know will have a capital gains liability, but only when I sell (I think). I also have a sizeable amount in a S&S ISA which I have built up over the years and which provides me with additional income.

Am I right in assuming that my taxable income is just £12570 and therefore I can earn up to £5000 in savings interest before paying tax? I presume the additional income I take from my ISA is outside the realm of tax calculations so doesn't need to be taken into account.

Thanks

No.

If your total non savings non dividend income is exactly £12,570 and you haven't applied for Marriage Allowance then you could earn £6,000 in taxable interest before paying any tax on it.

The first £5,000 will be taxed at 0% via the savings starter rate band.

The next £1,000 will also be taxed at 0% via the savings nil rate band (aka Personal Savings Allowance).

It's not unusual for people to miscalculate the State Pension that is taxable in a particular tax year (multiplying their 4 weekly payment by 12 or counting up what the received not what they were entitled to for a particular tax year being common errors) so if it turns out your non savings non dividend income was actually say £12,800 then you would have a smaller savings starter rate band available (plus the £1,000).

So in that situation it would be £5,770 in total
£4,770 x 0% (savings starter rate)
£1,000 x 0% (savings nil rate)

BooJewels

No, a bit more, you can receive up to £6,000 in interest before tax becomes payable.  You have your personal allowance (£12,570), which you've already accounted for, the £5,000 Starting Rate for Savings and then the £1,000 Personal Savings Allowance.  See:  https://www.gov.uk/apply-tax-free-interest-on-savings

ColdIron

Wotulookinat said:

The remainder of the inheritance money (£200k) is now invested in stocks and shares which I know will have a capital gains liability, but only when I sell (I think).

Yes only when you sell, but you can control it by staggering sales over financial years to stay within the £3,000 'allowance' or Annual Exempt Amount. Any dividends you receive are also taxable at 8.75% but you have a £500 annual dividend 'allowance' taxed at 0%

Am I right in assuming that my taxable income is just £12570 and therefore I can earn up to £5000 in savings interest before paying tax?

Your £12,570 is untaxed because it falls within your £12,570 Personal Allowance but you can also earn up to £6,000 (£5,000 starting rate for savings plus £1,000 Personal Savings Allowance) in savings interest without actually paying tax on it (taxed at 0%). So you will probably pay no tax on your interest

Read about it here
https://www.moneysavingexpert.com/savings/tax-free-savings

I presume the additional income I take from my ISA is outside the realm of tax calculations so doesn't need to be taken into account.

Yes

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

Dazed_and_C0nfused

ColdIron said:

Wotulookinat said:

The remainder of the inheritance money (£200k) is now invested in stocks and shares which I know will have a capital gains liability, but only when I sell (I think).

Yes only when you sell, but you can control it by staggering sales over financial years to stay within the £3,000 'allowance' or Annual Exempt Amount. Any dividends you receive are also taxable at 0.875% but you have a £500 annual dividend 'allowance' taxed at 0%

Am I right in assuming that my taxable income is just £12570 and therefore I can earn up to £5000 in savings interest before paying tax?

Your £12,570 is untaxed because it falls within your £12,570 Personal Allowance but you can also earn up to £6,000 (£5,000 starting rate for savings plus £1,000 Personal Savings Allowance) in savings interest without actually paying tax on it (taxed at 0%). So you will probably pay no tax on your interest

Read about it here
https://www.moneysavingexpert.com/savings/tax-free-savings

I presume the additional income I take from my ISA is outside the realm of tax calculations so doesn't need to be taken into account.

Yes

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

Wishful thinking!

ColdIron

Indeed

Wotulookinat

ColdIron said:

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

Thanks for the comprehensive replies (everyone)

....so, if the s&s investments are 'acc' rather than 'inc' and the dividends are re-invested, is the dividend tax liability only when the investments are sold, or is it when dividends are paid?

Also... wondering whether I need to do a tax return for the next financial year - I haven't done one since I retired 7 years ago as my finances have been very simple up to now, just state pension, slight SIPP top up and ISA drawings.

ColdIron

Wotulookinat said:

ColdIron said:

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

....so, if the s&s investments are 'acc' rather than 'inc' and the dividends are re-invested, is the dividend tax liability only when the investments are sold, or is it when dividends are paid?

'Fraid not on the Inc/Acc issue, you are the beneficiary either way, HMRC doesn't care what you do with them. You are liable annually in the year that the dividends arise in exactly the same way as if they had not been retained within the fund

As the dividends are not paid to you as cash they are harder to identify but your platform will issue an annual Consolidated Tax Certificate after the end of the tax year which will detail them, you can use those details for tax purposes rather than trying to figure it out for yourself

This raises an important point for you though. When you come to sell, part of your apparent gain (sale proceeds - cost) will be those dividends that you have already paid tax on and you don't want to be taxed twice so you can deduct them from that apparent gain

There are several other issues associated with CGT so it is essential that you keep accurate and complete records of all purchases and sales (costs, stamp duty if any, trading costs etc). An unfortunate consequence of holding investments outside of a tax wrapper

I strongly recommend that you make a start on that now, perhaps in Excel, as it will only get harder if you don't

Also... wondering whether I need to do a tax return for the next financial year - I haven't done one since I retired 7 years ago as my finances have been very simple up to now, just state pension, slight SIPP top up and ISA drawings.

I do Self Assessment so I'm not sure of the best way for you, I think you can do it online in your personal Tax account or even just phone them. Perhaps others can comment

BooJewels

In respect of doing a tax return, the Government page I linked to earlier under the section "If you go over your allowance" suggests that if you get State Pension, they'll automatically adjust your tax code to account for interest received - so have a look at that section.

I'm not yet in receipt of SP, but winding down my self-employment, so voluntarily do a self assessment tax return (earnings below the threshold to need to) and put my interest on there - largely because I knew that I'd need to this year as earned a lot more interest.  I also still need to pay a couple of years of NI to get a full SP - so it suits me to cover everything in the one task.

PloughmansLunch

ColdIron said:

Wotulookinat said:

ColdIron said:

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

....so, if the s&s investments are 'acc' rather than 'inc' and the dividends are re-invested, is the dividend tax liability only when the investments are sold, or is it when dividends are paid?

'Fraid not on the Inc/Acc issue, you are the beneficiary either way, HMRC doesn't care what you do with them. You are liable annually in the year that the dividends arise in exactly the same way as if they had not been retained within the fund

As the dividends are not paid to you as cash they are harder to identify but your platform will issue an annual Consolidated Tax Certificate after the end of the tax year which will detail them, you can use those details for tax purposes rather than trying to figure it out for yourself

This raises an important point for you though. When you come to sell, part of your apparent gain (sale proceeds - cost) will be those dividends that you have already paid tax on and you don't want to be taxed twice so you can deduct them from that apparent gain

There are several other issues associated with CGT so it is essential that you keep accurate and complete records of all purchases and sales (costs, stamp duty if any, trading costs etc). An unfortunate consequence of holding investments outside of a tax wrapper

I strongly recommend that you make a start on that now, perhaps in Excel, as it will only get harder if you don't

Also... wondering whether I need to do a tax return for the next financial year - I haven't done one since I retired 7 years ago as my finances have been very simple up to now, just state pension, slight SIPP top up and ISA drawings.

I do Self Assessment so I'm not sure of the best way for you, I think you can do it online in your personal Tax account or even just phone them. Perhaps others can comment

Just to quickly piggyback on a relevant thread rather than starting my own, I held units of an acc fund outside of an ISA wrapper for a while before swapping out to the inc. version as I couldn't be bothered with the potential headache. I actually had my consolidated certificate come through from HSBC this morning - it has Dividend Paid £xxx which is clear enough, but also Equalisation £xxx (lower amount) - do I include or ignore this latter figure in my self assesment?

InvesterJones

ColdIron said:

Wotulookinat said:

ColdIron said:

On the face of it the only income that you will pay tax on is the one you don't mention - dividends in your non-ISA stocks and shares account. Presumably you will be moving your investments annually into your ISA (which you will use the AEA above to avoid CGT on the sales)

....so, if the s&s investments are 'acc' rather than 'inc' and the dividends are re-invested, is the dividend tax liability only when the investments are sold, or is it when dividends are paid?

'Fraid not on the Inc/Acc issue, you are the beneficiary either way, HMRC doesn't care what you do with them. You are liable annually in the year that the dividends arise in exactly the same way as if they had not been retained within the fund

As the dividends are not paid to you as cash they are harder to identify but your platform will issue an annual Consolidated Tax Certificate after the end of the tax year which will detail them, you can use those details for tax purposes rather than trying to figure it out for yourself

This raises an important point for you though. When you come to sell, part of your apparent gain (sale proceeds - cost) will be those dividends that you have already paid tax on and you don't want to be taxed twice so you can deduct them from that apparent gain

There are several other issues associated with CGT so it is essential that you keep accurate and complete records of all purchases and sales (costs, stamp duty if any, trading costs etc). An unfortunate consequence of holding investments outside of a tax wrapper

I strongly recommend that you make a start on that now, perhaps in Excel, as it will only get harder if you don't

Also... wondering whether I need to do a tax return for the next financial year - I haven't done one since I retired 7 years ago as my finances have been very simple up to now, just state pension, slight SIPP top up and ISA drawings.

I do Self Assessment so I'm not sure of the best way for you, I think you can do it online in your personal Tax account or even just phone them. Perhaps others can comment

From https://www.gov.uk/tax-on-dividends:

Pay tax on up to £10,000 in dividends

Tell HMRC by:

• contacting the helpline
• asking HMRC to change your tax code - the tax will be taken from your wages or pension
• putting it in your Self Assessment tax return, if you already fill one in

--
£200K of investments will almost certainly be producing dividends greater than the £500 allowance.