Tax on interest

NSN1968

Hi,

My sister is recently widowed and is investing her life insurance to live off the interest.

The interest will take her just above her tax allowance and so my question is…

Is it better to fill out an R85 and get the interest paid gross then declare this in her self assessment or is it better to let her interest be taxed at source then claim some of it back with the R40 form?

Thanks, Neil.

jem16

She cannot fill in the R85 as the declaration states that you are a non-taxpayer and wish to receive gross interest.

It will have to be taxed and anything extra claimed back.

NSN1968

Thanks for that Jem16...

She will only be a tax payer as a result of the interest so at the time of opening the account before receiving any interest she actually isn't a tax payer. Does your comment still stand??

Neil

dunstonh

How old is your sister? Using savings accounts to provide an income is very inefficient and she will see her income and capital decline in real terms (as well as interest rates now looking like they will be falling). It may also not be tax efficient and use of the £7K ISA allowance and maybe NS&I certs for part of the money may be far more efficient.

NSN1968

Hi,

Thanks for the reply…

She is 35. She has £120k to invest/save. We will be utilising her ISA allowance (and her children’s) each year and are looking at the NS&I options.

She receives a widowed parent’s allowance which is taxable income but is not over her tax allowance (it’s just short of £5k per year). After maximising her tax free savings options, the interest earned on the balance of her capital will take her over her personal allowance for income tax. (hence my question about the R85)

We were planning to put the rest into a high interest savings account rather than investing it where the capital may be at risk (accepting inflation erosion). She is not looking to live off of the money for ever but would obviously like it to last as long as possible. While her children are young she will continue receiving the widow’s allowance as well as child tax credits and child benefit. This amount falls short of her cost of living and will need to draw on the interest and a small amount of the capital each month.

Any suggestions would be much appreciated.

Neil.

debbie42

NSN1968 wrote: »

We will be utilising her ISA allowance (and her children’s) each year and are looking at the NS&I options.

How old are her children? ISAs are only available from 16.

More info on R85 etc. here.
http://www.direct.gov.uk/en/Diol1/DoItOnline/DG_4017954

Basically, if you think you are going to be above your tax limit for the year then you shouldn't be filling out an R85 form. I'm not sure why you'd want to, either?

If it was my money, with that amount I'd be seeing an IFA.

NSN1968

We will be seeing an IFA, but want to get an idea of the options prior to that. Children are not ISA age.

Just to clarify, can any one tell me...

If a person's only income was from interest on savings and the interest in a year is £1 over their tax threshold, is ALL the interest taxed at 20% or just the £1 ?

oldfella

If a person's only income was from interest on savings and the interest in a year is £1 over their tax threshold, is ALL the interest taxed at 20% or just the £1 ?

---

£1 is taxed at 10%

debbie42

If you have your interest taxed at source then it's a flat 20% for all of it. If it should be any different, i.e. you should pay more or less, then you need to inform the tax office.

If you need to claim some back then you can use an R40 form. This is covered in the FAQ for the link I posted. It is helpful and in plain english, i.e. not gobbledygook!

NSN1968

Thanks Debbie,

I have read the link and it is clear.

Thanks everyone for your help.

graham47

dunstonh wrote: »

How old is your sister? Using savings accounts to provide an income is very inefficient and she will see her income and capital decline in real terms (as well as interest rates now looking like they will be falling). It may also not be tax efficient and use of the £7K ISA allowance and maybe NS&I certs for part of the money may be far more efficient.

Dunstonh,
Purely out of interest, if the person was (say) over 60, what would you suggest were the optimum ways to provide income from a cash lump sum ?