Tax on savings interest

goldengoldensky

Hello,

My elderly mother is selling her current home and has found a place that she wants to rent moving forward. As she will not be using the sale proceeds to buy another home, she would like to put them into NS&I guaranteed income bonds, where she will receive interest every month. However, she first wants to understand how much tax she will potentially be paying if she does this.

The only income my mother receives each month are pension payments, as follows:
£1,171 - state pension
£25 - small work pension
£887 - an inherited private work pension from her late husband

The monthly interest from the guaranteed income bonds would create an additional £1,032 a month.

I believe my mother will be able to use the £1,000 PSA (for basic rate) but I am not sure if she is eligible for the starting rate for savings (of up to £5,000) as I don't know whether the payment from the inherited private pension counts in the calculations (as it is already taxed at source).

If anyone can shed any light on this or is knowledgeable in taxes (for pensions/savings interest), any comments/information would be greatly appreciated. In case relevant, my mum is 82 years old and a widow.

Thank you in advance for your help.

masonic

If the inherited pension is being taxed at source, then it will be part of her taxable income (otherwise she'd be receiving it tax free, which can happen when the pension owner died before reaching the age of 75). This would mean her income would be above the threshold for the starter rate for savings.

eskbanker

goldengoldensky said:

The only income my mother receives each month are pension payments, as follows:
£1,171 - state pension
£25 - small work pension
£887 - an inherited private work pension from her late husband

When working out tax liabilities, it'll generally be best to work on annual figures rather than monthly, in particular state pension ones, given that it's generally paid four-weekly, not monthly (accepting that you may have already converted this).

Keep_pedalling

Yes, the inherited pension counts towards her total income and is way above £17,570 so she does not qualify for the starting savings rate. 

If she has not used this year’s ISA allowance she should consider putting £20k in one now and parking another £20k in an instant access account or premium bonds ready to transfer to an ISA on the 6th April. 

Kim_13

£1,032 interest a month would be well over any 0% bands available, so she should not put it all into Guaranteed Income Bonds in any case. £50,000 in Premium Bonds would be sensible (winnings are tax free, and with a full holding there is a better chance of reaching average returns - and as they are also an NS&I product, all of the money is safe.) She should also use her £20,000 ISA allowance each tax year, as interest earned on that is then tax free - fixed products that pay the interest away to a current account are available if that’s what she wants. Fixed ISAs mean she retains the right to access the money early if she needs (on payment of an interest penalty), whereas NS&I removed this option over 6 years ago now.

If she has not used any of her ISA allowance yet, she can put £20,000 in before April and then another £20,000 from April 6th.

eskbanker

Kim_13 said:

£1,032 interest a month would be well over any 0% bands available, so she should not put it all into Guaranteed Income Bonds in any case. £50,000 in Premium Bonds would be sensible (winnings are tax free, and with a full holding there is a better chance of reaching average returns - and as they are also an NS&I product, all of the money is safe.)

£50K in the guaranteed income bonds is likely to return more than £50K in premium bonds (with average luck), even if all of the former is subject to 20% tax....

goldengoldensky

Wow, thanks everyone for your helpful comments.

Will definitely look at the £20K ISA option and possible £50K premium bonds. Unfortunately I don't think she'll make the 6th April deadline for the ISA as her home has only just gone on the market but once she receives the sale proceeds then 20K can go into an ISA. 

So, if I reduce the expected sale proceeds by the ISA (£20K) & premium bonds (£50K) then her annual income will be as below:

Annual savings interest
£9,500 GICs
Annual pension income
£15,223 state pension
£300 small private pension
£10,644 inherited pension

Annual PSA
£1,000 (basic-rate taxpayer)

With the above details, is there a simple way to calculate what she is likely to pay in tax per year?

Thanks once again for your help.

Kim_13

eskbanker said:

Kim_13 said:

£1,032 interest a month would be well over any 0% bands available, so she should not put it all into Guaranteed Income Bonds in any case. £50,000 in Premium Bonds would be sensible (winnings are tax free, and with a full holding there is a better chance of reaching average returns - and as they are also an NS&I product, all of the money is safe.)

£50K in the guaranteed income bonds is likely to return more than £50K in premium bonds (with average luck), even if all of the former is subject to 20% tax....

The tax free and accessible elements are worth considering though, given that there is no mechanism for access once a GIB has been taken out. 

If your mum is able, it’s worth using what she can of her 25/26 allowance, as you don’t have to have £20,000 to use an ISA and once in the wrapper, it will remain tax free year after year. For example, anything she might currently pay into a Regular Saver or already have in Easy Access Savings (as you can have an Easy Access ISA as well and use that for emergencies.)

Kim_13

goldengoldensky said:

Wow, thanks everyone for your helpful comments.

Will definitely look at the £20K ISA option and possible £50K premium bonds. Unfortunately I don't think she'll make the 6th April deadline for the ISA as her home has only just gone on the market but once she receives the sale proceeds then 20K can go into an ISA. 

So, if I reduce the expected sale proceeds by the ISA (£20K) & premium bonds (£50K) then her annual income will be as below:

Annual savings interest
£9,500 GICs
Annual pension income
£15,223 state pension
£300 small private pension
£10,644 inherited pension

Annual PSA
£1,000 (basic-rate taxpayer)

With the above details, is there a simple way to calculate what she is likely to pay in tax per year?

Thanks once again for your help.

The PSA would leave £8,500 of interest to be taxed at 20%, so £1,700 on the interest. That would rise to £1,870 in 27/28, due to the two percentage point rise coming in then (£8,500 (or whatever interest might be then, less PSA) * 0.22. She should continue to use her ISA allowance in each tax year going forward, and presumably the total in savings would fall as some of it would be used on rent.

It’s also worth being careful to stay under £10,000 in taxable interest (so ISA interest and Premium Bonds don’t count) as that is the point that a Self Assessment Tax Return would be required. And if she can stay below £35,000 in taxable income (so GIB interest would be counted, but not ISAs and PBs) she would retain her Winter Fuel Payment.

goldengoldensky

Kim_13 - thank you so much for taking the time to explain things. I am much clearer now.

On a separate note, when I was looking on the NS&I website about GIBs, one of the FAQs was "Can I invest jointly?" - and the answer was "Yes". I wonder if it could be worth looking into a joint GIB account with my mother as it appears that the tax on interest defaults to a 50/50 split between both holders (regardless of who contributed). This would not affect my tax situation and would lower my mother's savings interest by half. Would this be allowed or is there something important that I have not considered or am unaware of?

Thank you.

Albermarle

It will also default to 50:50 ownership of the money, so effectively you will be making a gift to her.
Obviously you would hope she will give it you back one day and/or not spend it all/ get scammed. 
In fact I think most joint accounts can be emptied by either party.