Income Tax on Joint Savings Accounts

Oblivion

I think I have done a really stupid thing.

Just over a year ago with failing health, I was able to get early retirement, and walked away with a modest pension and a very sizeable lump sum. I immediately opened several new building society accounts so as to safely spread my lump sum around. Thinking I was doing the honourable thing by my wife of 34 years who is still working, each account was opened in our joint names, and I never gave any thought to possible tax implications.

Well now that we are approaching the end of the tax year, I have just calculated an early estimate of our respective tax liabilities for 2007/08. To my horror, I find that her 50% of the joint savings interest will push her, for the first time ever, well into the 40% tax band and she will be liable for an additional £900 tax as a result, whilst frustratingly I, on my modest pension, have more than enough 20% / 22% tax band unallocated to soak up my 50% share of the interest, and her's too if it were allowed, without going anywhere near the 40% band.

In other words, my wife will be penalised £900 extra tax, just because her name was added to the savings accounts bearing MY pension lump sum.

This seems so unjust. Does anyone know ...

1.) Are there plans afoot by Revenue to modify this unjust 50 / 50 rule and allow flexible allocation of interest earned between partners?

2.) Is there any workaround to escape this unanticipated and unwanted liability this tax year?

3.) Failing any other suggestions, I suppose we are just going to have to bite the bullet this year and stump up the extra tax. But my next action will be to contact the Building Societies concerned and ask if they would be willing to put the accounts in my sole name for next year, which seems a slight to my lovely wife.

Very frustrated. :think:
Scott.

whatatwit

As a follow on to Margaretclare, have you taken advantage of both of your ISA allowances for 07/08?
Whilst it won't help your current problem, it would remove some interest from the tax bracket.

My other thought is a Form 17, possibly some of the more 'qualified' tax bods out there will be able to advise if this would be OK in the circumstances.
As you intend to move most of the money into your name, and it was your money to start with, a Form 17 might do the trick.

mbamick

Is you wife able / willing to pay additional pension contributions? [i.e. as AVCs or into a SIPP]? For the purposes of self-assessment, the payments are deemed to have been made from GROSS INCOME, which would reduce the amount subject to Income Tax.

Oblivion

whatatwit wrote: »

As a follow on to Margaretclare, have you taken advantage of both of your ISA allowances for 07/08?
Whilst it won't help your current problem, it would remove some interest from the tax bracket.

Yes, I did at least get that right. We've both used our maximum ISA allowances every year.

Scott

Oblivion

mbamick wrote: »

Is you wife able / willing to pay additional pension contributions? [i.e. as AVCs or into a SIPP]? For the purposes of self-assessment, the payments are deemed to have been made from GROSS INCOME, which would reduce the amount subject to Income Tax.

Good suggestion, thank you. Yes I believe she can ... she's in the teachers' pension scheme which I think allows her to do that. We'll follow that up, cheers.

Oblivion

whatatwit wrote: »

My other thought is a Form 17, possibly some of the more 'qualified' tax bods out there will be able to advise if this would be OK in the circumstances.
As you intend to move most of the money into your name, and it was your money to start with, a Form 17 might do the trick.

OK, thanks, I'll look into that.

Scott

whatatwit

Have a look on HMRC site, it does give more info on form 17 and when it may or may not be used and i'm sure there is a retired HMRC poster who will advise more.
At least you sussed this out whilst you are still able to do something about it.

Oblivion

whatatwit wrote: »

Have a look on HMRC site, it does give more info on form 17 and when it may or may not be used and i'm sure there is a retired HMRC poster who will advise more.
At least you sussed this out whilst you are still able to do something about it.

Well I took a look at the HMRC site and unfortunately the notes that accompany form 17 make it clear that it does not apply to bank or building society interest from a joint account which is always deemed to be split 50 / 50. Oh well, it was worth a look. Back to the drawing board

Scott

Primrose

This is a difficult dilemma, especially in partnerships where both individuals believe in a fair split of finances. However, if most of the savings are in your name for tax purposes, how would your wife cope if you were to die suddenly and she had little access to money for emergencies in the months it could take for Probate to be obtained? It's not only a case of saving tax. It's also a case of organising your joint affairs for each others' peace of mind.

Cook_County

You might argue it never was hers & she was a mere nominee so her name is an irrelevance.

HMRC could of course challenge & you'd need to disclose on the returns.

I like the pension contribution idea much better.

jem16

Oblivion wrote: »

Good suggestion, thank you. Yes I believe she can ... she's in the teachers' pension scheme which I think allows her to do that. We'll follow that up, cheers.

She could do that although depending on her age it might be quite an expensive option. She could also look at a Personal pension as she would still get tax relief on that too and might give her more flexible options as she doesn't need to take it at the same time as her pension.

You would also need to look at her position in retirement as she may end up with too much pension provision and the tax she has saved now would be paid then.

You could use NS&I Index linked Certificates(tax-free) although you would need to tie up the money for at least a year to make it worthwhile interest wise. They have 3yr and 5yr issues but as long as you hold them for one year you get the interest and index-linking.

If your lump sum is sizeable you could look at investing it to provide an income rather than saving. There are some products that are tax efficient but seeing an IFA would be best depending on the amount involved.