Tax efficiency on savings interest

emspy12

Hello all, I have inherited a lump sum that I'd like to keep as savings until I retire in 5 years, with a view to buying a house for my retirement.

It would help a lot to minimise the tax I have to pay on the interest over the 5 years. I've seen somewhere that if you pay the interest into an ISA, it won't be taxed. Is this true? If yes, how does it work--you pay the interest into an ISA annually, and just include the ISA payment on your tax return to offset the savings interest declaration?

Lastly, if you're receiving interest on an ISA, does that not affect your overall tax burden when combined with the interest on the savings?

Sorry for long question, but I'd be grateful for advice. 

grumpy_codger

emspy12 said:

...I've seen somewhere that if you pay the interest into an ISA, it won't be taxed. Is this true? 

You can add up to £20K p.a. to your ISA(s) and interest ON your money held in ISA isn't taxed. Interest on money in other accounts is taxed if it exceeds your 

Personal Savings Allowance

Lastly, if you're receiving interest on an ISA, does that not affect your overall tax burden when combined with the interest on the savings?

No, it doesnt.

Dazed_and_C0nfused

emspy12 said:

Hello all, I have inherited a lump sum that I'd like to keep as savings until I retire in 5 years, with a view to buying a house for my retirement.

It would help a lot to minimise the tax I have to pay on the interest over the 5 years. I've seen somewhere that if you pay the interest into an ISA, it won't be taxed. Is this true? If yes, how does it work--you pay the interest into an ISA annually, and just include the ISA payment on your tax return to offset the savings interest declaration?

Lastly, if you're receiving interest on an ISA, does that not affect your overall tax burden when combined with the interest on the savings?

Sorry for long question, but I'd be grateful for advice. 

No it isn't true, total fake news.

Interest you earn within an ISA is exempt from tax.

Interest from non ISA accounts is taxable however the amount of tax you will pay depends on what other income you have each tax year.

In theory you could have interest of £18,570 and nothing would be taxed above 0%.  But earnings and pension income will reduce that figure.  As would self employment profits or rental income. And a few other things.

You would never declare interest from an ISA on a Self Assessment return.

Albermarle

Suggest you read through this.
Savings | MoneySavingExpert

InvesterJones

To add to the above, if it's not currently in an ISA then you'll pay any tax due on the interest regardless of what you do with that interest. If you put it in an ISA then from then on, any interest it earns in the ISA is exempt, but you'll still owe whatever was due from interest it made outside of the wrapper before that point.

Ch1ll1Phlakes

emspy12 said:

I've seen somewhere that if you pay the interest into an ISA, it won't be taxed. Is this true? 

No. This is not true. The interest paid on funds in an ISA is tax-free.

emspy12 said:

If yes, how does it work--you pay the interest into an ISA annually, and just include the ISA payment on your tax return to offset the savings interest declaration?

As it's not possible, you can't declare it on a tax return.

emspy12 said:

Lastly, if you're receiving interest on an ISA, does that not affect your overall tax burden when combined with the interest on the savings?

No. Interest in an ISA is tax-free and doesn't affect your personal savings allowance or tax burden.

emspy12 said:

Hello all, I have inherited a lump sum that I'd like to keep as savings until I retire in 5 years, with a view to buying a house for my retirement.

To answer where all the questions are coming from. If your goal is to keep the money safe for the next 5 years, then a Cash ISA could be a good option. Any interest earned inside an ISA is completely tax-free, which is useful if your lump sum would generate more interest than your Personal Savings Allowance allows. You can put up to £20,000 each tax year into ISAs, so depending on the size of your inheritance you may need to spread it across multiple years or combine with other savings accounts. Since you’re planning to use the money in 5 years for a house, keeping it in cash savings rather than investing may suit you better as you avoid market risk.

If you're not sure about how ISAs work I've attached a link to the MoneySavingExpert page on ISAs Cash ISAs - MSE. A read of the this will help you better understand how they work.

flaneurs_lobster

It would help if you could mention the amount you have inherited. 

emspy12

InvesterJones said:

To add to the above, if it's not currently in an ISA then you'll pay any tax due on the interest regardless of what you do with that interest. If you put it in an ISA then from then on, any interest it earns in the ISA is exempt, but you'll still owe whatever was due from interest it made outside of the wrapper before that point.

Thanks so much--I think this is partly where my puzzlement comes from: so as soon as it's invested in an ISA, the interest is no longer taxable?

If that's the case, how do you declare it on an income tax return? 

For example, say the capital earnt £20K in interest, but you paid it straight into an ISA on receipt.

This would avoid tax on that interest going forward, but are you saying you would be taxed on it on receipt anyway if it exceeded your personal savings allowance? 

Dazed_and_C0nfused

emspy12 said:

InvesterJones said:

To add to the above, if it's not currently in an ISA then you'll pay any tax due on the interest regardless of what you do with that interest. If you put it in an ISA then from then on, any interest it earns in the ISA is exempt, but you'll still owe whatever was due from interest it made outside of the wrapper before that point.

Thanks so much--I think this is partly where my puzzlement comes from: so as soon as it's invested in an ISA, the interest is no longer taxable?

If that's the case, how do you declare it on an income tax return? 

For example, say the capital earnt £20K in interest, but you paid it straight into an ISA on receipt.

This would avoid tax on that interest going forward, but are you saying you would be taxed on it on receipt anyway if it exceeded your personal savings allowance? 

You seem to totally misinterpreting what people are saying. All savings interest earned outside an ISA is taxable and would be declared on a Self Assessment return if you needed to compete one. 

Moving it into an ISA does not in any way change that.

The tax payable would depend on what other taxable income (and types of taxable income) you had in the same tax year.

However interest earned from money within an ISA is exempt from tax and you would not declare that interest on a tax return.

You do seem to be making this far more complicated than it actually is!

wmb194

emspy12 said:

InvesterJones said:

To add to the above, if it's not currently in an ISA then you'll pay any tax due on the interest regardless of what you do with that interest. If you put it in an ISA then from then on, any interest it earns in the ISA is exempt, but you'll still owe whatever was due from interest it made outside of the wrapper before that point.

Thanks so much--I think this is partly where my puzzlement comes from: so as soon as it's invested in an ISA, the interest is no longer taxable?

If that's the case, how do you declare it on an income tax return? 

For example, say the capital earnt £20K in interest, but you paid it straight into an ISA on receipt.

This would avoid tax on that interest going forward, but are you saying you would be taxed on it on receipt anyway if it exceeded your personal savings allowance? 

You’re talking about two separate events.

1. You earn £20k interest in a taxable account. You declare this on your tax return.

2. You deposit this interest an Isa. All future returns are tax free.

InvesterJones

wmb194 said:

emspy12 said:

InvesterJones said:

To add to the above, if it's not currently in an ISA then you'll pay any tax due on the interest regardless of what you do with that interest. If you put it in an ISA then from then on, any interest it earns in the ISA is exempt, but you'll still owe whatever was due from interest it made outside of the wrapper before that point.

Thanks so much--I think this is partly where my puzzlement comes from: so as soon as it's invested in an ISA, the interest is no longer taxable?

If that's the case, how do you declare it on an income tax return? 

For example, say the capital earnt £20K in interest, but you paid it straight into an ISA on receipt.

This would avoid tax on that interest going forward, but are you saying you would be taxed on it on receipt anyway if it exceeded your personal savings allowance? 

You’re talking about two separate events.

1. You earn £20k interest in a taxable account. You declare this on your tax return.

2. You deposit this interest an Isa. All future returns are tax free.

And no.1 continues to apply even after the interest is deposited in the ISA. I.E. all future returns from the amount in the ISA are tax free.. if you've still got your capital that earned the 20k interest somewhere else then its interest will continue to be taxed.