What would you do?

1spiral

My spouse is a non tax payer and has most of our savings are in her name. Due to previous rising interest rates we moved most of the savings into accounts that deferred interest until this year.

A quick calculation at current rates indicates she is likely to exceed this years tax allowance by about 5K so have a bill of ~1K to pay.

Moving to those deferred interest accounts last year was an easy decision because rates were rising and it was done as part of the chasing rates process and resulted in falling below the tax threshold.

My question is, is this a worthwhile process to repeat now that rates are falling in order to minimise/extinguish the tax burden for this year by deferring interest to next year when rates may not be high enough to cause the interest to exceed the tax thresholds?

I appreciate that to achieve this we will need to move from accounts currently paying 5.1% plus into accounts that are 4.9 or lower and it sounds a bit like the tax tail wagging the dog but it seems to me that an account paying 5.1% is only about 4.1% if you pay 20% tax on it whereas if I get 4.9% deferred until next year and pay no tax it is still 4.9%

I also appreciate that no one can ever truly predict what interest rates will do but does the idea of chasing lower rates to defer/avoid tax seem counter-intuitive?

Mark_d

Have you thought about using ISAs and Premium Bonds to protect the income on cash savings from being taxed?

jimjames

How much cash are you holding if you're exceeding the allowance by £5k? That sounds an excessive amount unless you have a specific reason for holding that. (Although you've not actually said how much income you're expecting so you might not have used the correct allowances?)

Albermarle

My spouse is a non tax payer 

A person with no taxable income can earn up to £18,750 in interest per year without paying interest.

If she is a low earner she can earn £18750 minus her earnings.

Maybe you already knew that and actually have a very large amount of cash savings?

wmb194

1spiral said:

My spouse is a non tax payer and has most of our savings are in her name. Due to previous rising interest rates we moved most of the savings into accounts that deferred interest until this year.

A quick calculation at current rates indicates she is likely to exceed this years tax allowance by about 5K so have a bill of ~1K to pay.

Moving to those deferred interest accounts last year was an easy decision because rates were rising and it was done as part of the chasing rates process and resulted in falling below the tax threshold.

My question is, is this a worthwhile process to repeat now that rates are falling in order to minimise/extinguish the tax burden for this year by deferring interest to next year when rates may not be high enough to cause the interest to exceed the tax thresholds?

I appreciate that to achieve this we will need to move from accounts currently paying 5.1% plus into accounts that are 4.9 or lower and it sounds a bit like the tax tail wagging the dog but it seems to me that an account paying 5.1% is only about 4.1% if you pay 20% tax on it whereas if I get 4.9% deferred until next year and pay no tax it is still 4.9%

I also appreciate that no one can ever truly predict what interest rates will do but does the idea of chasing lower rates to defer/avoid tax seem counter-intuitive?

Just to double-check; you're talking about exceeding the £12.57k personal allowance + £5k savings starting rate + £1k savings allowance - the £1k marriage allowance transfer if applicable?

I would maximise my net return. Look at Isas. If you're willing to lock money away you could look at low coupon gilts on which capital gains are tax free.

https://www.yieldgimp.com/gilt-yields

1spiral

Yes there is a lot of cash (inheritance which we are holding as cash as we may look to buy a house later this year/next year but I'm wondering whether to mitigate this by deferring some interest in case this doesn't happen). Her interest will be about 22K (at current rates). We're already maxed out on Isa's/premium bonds and she has transferred the marriage allowance to me so the 22K will be about 5K over.

As I mentioned above, some of this interest is already deferred (by opening accounts paying annual interest) from last year so wondering whether to repeat this exercise to defer until next year.

I did think about short term gilts but would only be willing to take that on if I was sure I could hold until maturity and not need to sell early.

Roger175

If it's relatively short term as you suggest and you've done all the obvious things (ISAs, PBs etc), then I would just accept that some tax is payable.

Just think of it as being lucky that you can now generate that much interest, only a very few years ago, you would have been struggling to get anything.

ChilliBob

Surely the short term Gilts make sense for at least some of it? TN25 expires at the end of Jan next year - less than a year fix.

4.55% yield now - tax free minus the tiny coupon. That's equivalent to 5.7% if you factor in the 20% tax you'd pay on it. A bit less when you factor in dealing costs, but not much. 

You could hold that one, and some savings the conventional way.

Interesting though thay if you put all of it in that gilt you'd probably get a better overall return - unless you have some fixes above say 5.6% - I have a couple, but most are lower. 

Due to my plans for cash I have a decent amount in TN25, T26A and TN28. Alongside conventional fixes and easy access savings. 

Oh and of course you don't need to faff with the 85k limit with Gilts (or NS&I, but low rates) if that's also an issue 

1spiral

Thank you all for your suggestions. I might still go the way of gilts but was surprised that no one saw the option of choosing a deferred interest account as a possible way to go. I asked the question because to me it seemed sound but I was wondering if I'd missed something obvious. No one has backed this idea but equally no one has given a sound reason not to either so I may still go that route. As @Roger175 says, it may be that she just has to accept some tax and be thankful that we earn that much in interest to have this as a "problem"

Albermarle

My question is, is this a worthwhile process to repeat now that rates are falling in order to minimise/extinguish the tax burden for this year by deferring interest to next year when rates may not be high enough to cause the interest to exceed the tax thresholds?

Presume by 'deferred interest' you mean fixed term savings accounts, that mature after a fixed period?

In this case you will have a fixed interest rate through the period of the fix, so it will not matter what rates are when the term is up and the interest is paid.

If you think interest rates are falling then it makes sense to fix anyway. You can fix from 6 months up to 7 years and many periods inbetween.

EthicsGradient

1spiral said:

My spouse is a non tax payer and has most of our savings are in her name. Due to previous rising interest rates we moved most of the savings into accounts that deferred interest until this year.

A quick calculation at current rates indicates she is likely to exceed this years tax allowance by about 5K so have a bill of ~1K to pay.

Moving to those deferred interest accounts last year was an easy decision because rates were rising and it was done as part of the chasing rates process and resulted in falling below the tax threshold.

My question is, is this a worthwhile process to repeat now that rates are falling in order to minimise/extinguish the tax burden for this year by deferring interest to next year when rates may not be high enough to cause the interest to exceed the tax thresholds?

I appreciate that to achieve this we will need to move from accounts currently paying 5.1% plus into accounts that are 4.9 or lower and it sounds a bit like the tax tail wagging the dog but it seems to me that an account paying 5.1% is only about 4.1% if you pay 20% tax on it whereas if I get 4.9% deferred until next year and pay no tax it is still 4.9%

I also appreciate that no one can ever truly predict what interest rates will do but does the idea of chasing lower rates to defer/avoid tax seem counter-intuitive?

Exactly what is available to you for accounts that only pay the interest in the next tax year will depend on what access you have/will want from an account - you later say "we may look to buy a house later this year/next year", so does that mean it is all in easy access (or perhaps notice) accounts, or that you will want it to be from now on? There is, for instance, a 95-day notice account from LHV (I confess I've never heard of them) paying 5.3% - with only complete withdrawal available, but only paying the interest on closure. If you may not need the money until next tax year, that could work out well for you. And Charter Savings Bank pays 5.25% (95-day notice, interest paid on anniversary as an option).

In easy access accounts, the top at 5.2% is Ulster Bank, which pays annually. You need to open a current account with them too - check the MSE forums for people's experience with them, and see if it looks like it'd suit you (oh - I just looked, and it pays on the 1st business day of January, so that'd be just over half a year's interest in this tax year, so maybe not so great).