interest on savings

zagfles

kempiejon said:

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. 

Ordinary gilts are hardly exotic, they're pretty easy to understand if you simply intend to hold to maturity, you buy at whatever the market price is eg 93p and on a set date in the future you get £1. Maybe people get confused with all kinds of irrelevant gubbins like yield curves, running yield, yield to maturity etc. For low coupon gilts all you're really interested in is the buy price and maturity date, the effective interest rate is easy to work out. 

The coupon may be a bit complicated and paying accrued interest up front, but with low coupon gilts it's trivial amounts. But should be enough to pay platform fees as long as you buy a reasonable amount. 

Index linked gilts and gilt strips etc are a bit more exotic. And ZDPs etc, and having to understand what counts as a "deeply discounted security" where capital gains are taxed as income. But you don't get that problem with low coupon gilts. 

learningmore

Bigwheels1111 said:

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.

You tell me.

I'm on here for advice as a new member.   My income is variable and generally is around the allowance figure.

Flugelhorn

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. 

honest I am not barking, just don't fancy the sound of low coupon gilts (whatever they are)

learningmore

Dazed_and_C0nfused said:

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.

It's on this website if you look under savings / tax allowances etc.   
I don't believe it's wrong information.    I've never seen anywhere that says you can earn 6k a year tax free.

There is a section on savings vs ISA I believe so I will consult this in more detail as to which is the better option.

learningmore

Nick_C said:

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


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.  

Thank you for this response.    Appreciated.

Dazed_and_C0nfused

learningmore said:

Dazed_and_C0nfused said:

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.

It's on this website if you look under savings / tax allowances etc.   
I don't believe it's wrong information.    I've never seen anywhere that says you can earn 6k a year tax free.

There is a section on savings vs ISA I believe so I will consult this in more detail as to which is the better option.

You might find this a useful read.  As I say, £18,570 is the starting point.  Outside of an ISA lots of people are limited to having just £500 or £1,000 taxed at 0%.  But equally plenty have far more than that and pay no tax on it.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-savings-income

learningmore

I've just had a look.

I'm guessing you mean that people earning way below the personal allowance are the ones who are able to save large amounts (up to the threshold) tax free?    I can't see any other information in that article that suggests alternatives.

jimjames

Nick_C said:

learningmore said:

sheslookinhot said:

Nick_C said:

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.

If that’s all folk have to worry about they are in a better place than many.

It appears you choose to make assumptions here; I wish that were the way.

As Investor Jones has said, perhaps address the original query rather than make assumptions about people's own circumstances.    

No need to comment otherwise if it isn't constructive.

A couple of years ago, you could have had nearly £80k in instant access accounts, and not exceeded the £1k threshold.  Not, someone with around £20k in savings can easily exceed the threshold.

But this is a temporary problem, as interest rates are falling.

Even easier if you have limited savings you can put £20k per year into an ISA and protect it from tax forever.

learningmore

jimjames said:

Nick_C said:

learningmore said:

sheslookinhot said:

Nick_C said:

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.

If that’s all folk have to worry about they are in a better place than many.

It appears you choose to make assumptions here; I wish that were the way.

As Investor Jones has said, perhaps address the original query rather than make assumptions about people's own circumstances.    

No need to comment otherwise if it isn't constructive.

A couple of years ago, you could have had nearly £80k in instant access accounts, and not exceeded the £1k threshold.  Not, someone with around £20k in savings can easily exceed the threshold.

But this is a temporary problem, as interest rates are falling.

Even easier if you have limited savings you can put £20k per year into an ISA and protect it from tax forever.

I personally wouldn't deem saving up to 20k per year as 'limited', but I get your point.

Nick_C

Re ISAs - yes, you can (if you're lucky) save £20k a year in ISAs, but in the case of Cash ISAs, these have not offered good returns in recent years.  For someone with a savings pot of about £20k (who is a basic rate taxpayer with a "moderate" (see above) income, cash ISAs have not been a great idea.  

I only went back into Cash ISAs 18 months ago to avoid having to pay tax on my savings interest.  As interest rates fall, I expect to move away from Cash ISAs in the next year or two.