interest on savings

learningmore

Hi all,

Given that a saver can only earn £1000 of tax free interest in a savings account, is there no point in saving an amount higher than what Martin recommends (Around 18-19 thousand or so I think)   as above the 1000 I believe it is 20% tax (in my case)?    Are there any other options?    I'm not particularly up on all this so hopefully someone might be able to advise.    I know there are ISAs out there but I'm wondering is there a best option to minimise the 20% hit on anything more than the 1000 allowance of tax-free interest.

Thanks in advance.

Catplan

is it really that bad if you need to pay tax on interest above your personal allowance? 

Some might consider it a nice problem to have, you can of course max pension, isa and then taxable savings but I’d rather my money was earning the top rate as opposed to a pittance just to avoid paying tax.

Bigwheels1111

Is 80% of something better than Nothing ?.

First 20K at say 5% will not be taxed as  hits the £1,000 limit before tax, Any interest on an ISA is not taxed so open one if you need.

In simple terms Do you earn more than £17,570 a year, Plus how much money do you have saved.

I'm a carer so only earn £4,268.80.

£18.570 - £4,268.80 = £14,301.20 of tax free interest me.

£12,570 personal allowance

£  5,000 Starter saving rate

£  1,000 Personal saving allowance.

Dazed_and_C0nfused

learningmore said:

Hi all,

Given that a saver can only earn £1000 of tax free interest in a savings account, is there no point in saving an amount higher than what Martin recommends (Around 18-19 thousand or so I think)   as above the 1000 I believe it is 20% tax (in my case)?    Are there any other options?    I'm not particularly up on all this so hopefully someone might be able to advise.    I know there are ISAs out there but I'm wondering is there a best option to minimise the 20% hit on anything more than the 1000 allowance of tax-free interest.

Thanks in advance.

I don't know where you have read that but it's completely wrong.

Ignoring ISA's, which in themselves are fairly generous when it comes to avoiding tax, the starting point each year is you can earn £18,570 in interest before paying tax on it.

Applying for Marriage Allowance reduces that to £17,310 and then any taxable non savings non dividend income such as earnings, pension income, self employment or rental profits further reduces it.

But even a basic rate payer could sometimes have £5,999 in interest without paying tax on it.

Nick_C

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

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

So for a taxpayer with a moderate income (£17570 to £50270), you will pay income tax on savings interest above £1000 a year unless you shelter it in an ISA.

Personally, I find dealing with HMRC to be such a hassle that I avoid having my taxable interest exceed £1k a year.  This means in some cases I am putting money into a flexible ISA that currently pays 4.75% instead of regular savers that could pay 6.5% gross (5.2% net).

I monitor my interest and forecasts carefully to stay under the £1k limit.  

But to give you an idea of the hassle of dealing with HMRC, I updated my tax account online yesterday to correct the forecast income from some temp jobs that I had.  HMRC revised my tax code (when it was already correct), and estimated my taxable interest on savings for the current year to be £1356.  They seem to look at year to date figures and assume income will continue at the same rate.  It took two phone calls and more than an hour to get them to amend their records.  Plus the time to check their data and calculations.  And more time next week to check my revised tax code.  A huge waste of my time and theirs.  

Flugelhorn

it really is best to accept that having 60% or 80% of something is better than nothing. I pay 40% on most of my savings, it is better than nothing and not sure what else I could do with the money 

Mark_d

I use my ISA allowance for S&S because that's where I expect to benefit more from the tax free status.  For tax free growth on cash, I use premium bonds.   Other than that I will have to pay tax on some cash savings but this is done by an adjustment in my tax code.  No issue really.

maman

I think the issue is that for so many years we've got used to interest rates on savings being so low that they were better than nothing. 

Now we're into the situation where 60-80% of the interest is also better than nothing. 😁

Nick_C

Interest rates are still relatively high compared to CPI inflation, so even higher rate taxpayers should be getting a small amount of real growth on their savings.  That is unusual though, and I don't expect it to last.  I think those of us worrying about exceeding the £1k annual taxable interest won't have to worry about it next year.

zagfles

It's barking to be paying 40% tax on any significant amount of savings. Even after you've used up tax free options like ISAs and premium bonds, you can have unlimited amounts in the low coupon gilts which are free of CGT and will almost certainly provide a return better than any savings account taxed at 40%. It's a bit more marginal for 20% tax payers. 

kempiejon

zagfles said:

It's barking to be paying 40% tax on any significant amount of savings. Even after you've used up tax free options like ISAs and premium bonds, you can have unlimited amounts in the low coupon gilts which are free of CGT and will almost certainly provide a return better than any savings account taxed at 40%. It's a bit more marginal for 20% tax payers. 

I feel low coupon short dated gilts are a bit exotic for some. Having not bothered with gilts for years they have become attractive. Building a ladder of known amounts and maturities is handy retirement income planning. The tax treatment being the icing as interest rates have increased and personal allowances decreased.
I use regular savers and some fixed terms to direct my interest income into the right tax years, a few £k in easy access accounts and I've run up to the limit. So I park cash in premium bonds, when they're full short term gilts are also good.
I have dallied with zero dividend preference shares - much more exotic and there are some v risky versions out there but I have been doing OK so far with a couple. I'm counting on the ZDPs much like gilts redeeming at a known amount on set dates in the future. The uplift is capital so watch that allowance of £3k this year.