Monthly or yearly interest - will be non-taxpayer in a year

Agent_C

I have a savings account with Icesave and a fixed rate bond with Birmingham Midshires. I opted for monthly interest when I opened the accounts.

I have decided that this autumn I'm going to take a break from work and go back to University to do a Masters. As I will have no income, I will presumably no longer be a taxpayer.

Would there be any benefit to me changing to yearly interest - will I pay no tax at all on the accumulated interest if I am no longer a taxpayer, or will the tax be decided on a pro-rata basis taking into account the months that I was a taxpayer?

If so, I know I can change the Icesave account to yearly interest - does anyone have any experience of doing this with BM/fixed rate bonds? Thanks!

LittleVoice

If you are doing a full-time Masters course, will this be for one year? If so, because it will spread over two tax years, I see no tax advantage to your taking interest annually or monthly because your employment income should take you into paying tax (unless you are very low paid or if you do not find work when you gain your degree).

Only advantage would be if you would have one complete tax year (April-April) when you would not earn from employment - and providing your savings are not so high that the interest received would mean you would be paying tax in any event. In that case you could manipulate payments to maximise in the non-tax payer year.

cloud_dog

Tax isn't really a pro-rata thing.

I know you are taxed monthly but that is because they work out how much tax you owe and spread it over a year, otherwise you wouldn't have any income until July / August or whenever you have paid your tax bill.

You have a tax-free earnings limit, once that limit is reached you are taxed, so it depends how much you will earn from April to August.

Agent_C

Thanks - the Masters is indeed for a year, but if I get funding then I may extend it and do a PhD for three years, so I guess I might as well switch to yearly interest as I won't lose anything if I do start working agin after the Masters.

masonic

Agent_C wrote: »

so I guess I might as well switch to yearly interest as I won't lose anything if I do start working agin after the Masters.

There is a miniscule advantage to taxpayers taking an annual interest option anyway. The compound interest you get from monthly interest payments is slightly reduced (compared with one annual payment) by the taxman taking a bite every month.