Tax on savings

Andrew68

We are about to sell our house put the funds of 485k into my wife’s bank account which is Ulster Bank and 4.5% interest; think we will put 20k each into an isa too; but, my question is, we will earn around £1830/month in interest. 

My wife is shortly going to start working as a PAYE earning around £1250/month, so how will HMRC collect 20% tax from our her interest earnings ?

(I’m right on my limit of paying 40% tax and manage this by placing quite a lot of income in my pension each month) 

(we plan on buying another house shortly but it won’t be at least 3 months) 

any help from the accountant experts on here would be greatly appreciated ! 

El_Torro

£50k each in Premium Bonds might not be a bad idea. The expected return isn't great but it's tax free at least.

HMRC won't collect any tax from this interest, especially if you don't tell them about it in advance. You can get your wife's tax code changed to reflect it, though that will only take care of some of the tax. Expect a bill from HMRC at the start of the new tax year though. 

Dazed_and_C0nfused

Andrew68 said:

We are about to sell our house put the funds of 485k into my wife’s bank account which is Ulster Bank and 4.5% interest; think we will put 20k each into an isa too; but, my question is, we will earn around £1830/month in interest. 

My wife is shortly going to start working as a PAYE earning around £1250/month, so how will HMRC collect 20% tax from our her interest earnings ?

(I’m right on my limit of paying 40% tax and manage this by placing quite a lot of income in my pension each month) 

(we plan on buying another house shortly but it won’t be at least 3 months) 

any help from the accountant experts on here would be greatly appreciated ! 

Will she even have any tax to pay for this tax year?

Has she applied for Marriage Allowance?

What other income will she have in this tax year apart from the new job and the interest?

What do you expect her 2025/26 P60 to show her taxable pay as next April?

What is your estimate of the total of her (taxable) interest for 2025/26?

singhini

On the assumption your wife has had no earnings YTD, she also has a full £12,570 personal allowance and you both will put £20k each into an ISA which leaves £445k to go into her account earning 4.5% ------> i make that about £1,670 in monthly interest.

Add to this about £1,250 monthly salary   

So between now and to the end of the tax year (Nov 2025 to March2026)

Take Home = £6,250

Interest earnt = £8,350

-----------------------------------

Total earnings = £14,600

Now you need to apply your allowances in order

Since your total income (£14,600) is below £17,570 (the “starting rate for savings” threshold), you benefit from the 0% starting savings rate.

The starting rate for savings applies up to £5,000 if your non-savings income (salary) is below £17,570.

Your non-savings income = £6,250 ------>  this is below £17,570, so you get up to £5,000 at 0%

So

You have £12,570 of tax-free income to allocate:

£6,250 covers all your salary (non-savings income).

Remaining allowance: £12,570 − £6,250 = £6,320 applies to savings interest.

That means:

£6,320 of your £8,350 interest is tax-free (covered by whats left of your personal allowance).

£8,350 − £6,320 = £2,030 of interest remains taxable.

You have £2,030 of interest left to tax ------>  but that fits entirely within the £5,000 starting rate band ------> so i make it that you won't have any tax to pay.

PS ------> None of the above is reliable information and you should seek proper advice (ive guessed everything and expect someone to come along and rip this all apart)

Vitor

HMRC won’t deduct tax at source, the bank pays interest gross. Your wife’s bank will report her annual interest to HMRC, and they’ll either adjust her PAYE code or ask her to do Self Assessment.

Given her modest salary and large savings, she’ll likely pay little or no tax on the interest because of the personal allowance, starting savings rate, and £1,000 PSA.

Using ISAs is wise. Just remember FSCS limits if you’re parking the full £485k in one bank, protection on National Savings & Investments (NS&I) is unlimited.

SacredStephan

Andrew68 said:

so how will HMRC collect 20% tax from our her interest earnings ?

The interest that she earns in the 25-26 tax year won't be reported by the bank(s) to HMRC until summer 2026. It will then take HMRC a few months to calculate her taxable income and tax due.