Tax on saving interests without an income

[david]

sorry if this is covered somewhere as haven't found it - a family member with no income has a significant amount of savings that wants to put on a fixed bond to generate interest (I tried to explain capital will erode to no avail, he wants zero risks as took money out of markets recently) so he is looking to place 200k at 4-4.5% fixed bond which will generate 8-9k/year.

isa is already maxed out so no option to go there

question is - with no other income, how much tax would be due on that interest? I checked hmrc web (https://www.gov.uk/apply-tax-free-interest-on-savings) but is unclear to me which option would apply of the below:

1) he could offset entire 9k interest against personal allowance due to not having income so 9k saving interest would be tax free - in this case, would it be the limit of tax-free saving interests 18570?
2) he can have starting rate for savings and personal saving allowances given no income which is 5k+1k = 6k tax free, but tax would be due on the remaining 3k on basic rate
3) any other option I haven't consider

assuming he would have to pay tax, is there any other zero-risk vehicle more tax efficient? Isa and pension contributions are already covered to the limit, so not an option.

tia

[tjh290633]

If his income is less than the personal allowance, then no tax is due. Nothing else matters. If it is more than the personal allowance then the tax-free allowances for interest or dividends come into play.

TJH

[mc2fool]

1.

[monabri]

https://www.gov.uk/income-tax-rates

If your annual income in the tax year is £12570 or less, then income tax is zero. The £12570 is the current personal allowance.

So if the income is £9k then no tax should be payable.

[david]

Thanks for all the replies!

I have a follow up, self-assesment requirements in this scenario - is a self-assessment required if saving interest income exceeds 10k? meaning that even though a purely saving interest income up to 18570 would be tax free, a self-assesment would be required if interests exceed 10000, is this correct?

[chas49]

Thanks for all the replies!

I have a follow up, self-assesment requirements in this scenario - is a self-assessment required if saving interest income exceeds 10k? meaning that even though a purely saving interest income up to 18570 would be tax free, a self-assesment would be required if interests exceed 10000, is this correct?

Based on your scenario (>£10k savings interest income and no other income), then https://www.gov.uk/check-if-you-need-tax-return says

Yes: https://www.gov.uk/check-if-you-need-ta ... nvestments

[david]

If his income is less than the personal allowance, then no tax is due. Nothing else matters. If it is more than the personal allowance then the tax-free allowances for interest or dividends come into play.

TJH

Thanks for the replies, I want to confirm the limit tax is due coming from interests in savings:

- If only and solely income for an individual is interest from savings
- Personal allowance of £12570 would be tax free
- Starting rate for savings would be £5000 more
- Personal savings Allowance would be £1000 more

So, could someone earn £18570 purely from interests on savings without paying any tax? Beyond £18570, basic rate would apply?

[chas49]

So, could someone earn £18570 purely from interests on savings without paying any tax? Beyond £18570, basic rate would apply?

The explanation at https://www.gov.uk/apply-tax-free-interest-on-savings implies you can have all three but isn't totally clear IMHO.

This article (https://www.moneysavingexpert.com/savin ... e-savings/) agrees that the allowances are cumulative.

So in the scenario given (with NO other income), no tax would be due on up to £18570 of taxable savings income (income from ISAs not being taxable!)

[mc2fool]

Thanks for the replies, I want to confirm the limit tax is due coming from interests in savings:

- If only and solely income for an individual is interest from savings
- Personal allowance of £12570 would be tax free
- Starting rate for savings would be £5000 more
- Personal savings Allowance would be £1000 more

So, could someone earn £18570 purely from interests on savings without paying any tax? Beyond £18570, basic rate would apply?

Yes, but there is a subtlety in this in that the loss of £1 of starting rate allowance for each £1 of non-savings income above the PSA can, in some situations, effectively put you into a 40% tax band.

E.g. if you have a non-savings income (job, pensions, whatever) of £12570 and interest on savings of £6000, then you pay no tax. But if your non-savings income goes up by £1, as that is no longer within the PSA that £1 will get taxed at 20% and it will also reduce your starting rate allowance by £1 meaning only £4999 will be within it and the last £1 also taxed at 20%. Every further increase in non-savings income up to £5000 will also effectively get taxed at 40%.

[airbus330]

Thanks for posting these replies as I'm currently organising my wife's modest retirement income so that she will pay virtually zero tax.
Re. Self Assessment. Does the Starting rate for savings 5000 allowance get automatically applied during the self assessment calculation? Or does it have to be applied for separately?
As an example.
Interest received from non-ISA savings account. 1500
DB Pensions 5000
Yearly Income 6500
therefore entirely within the personal allowance and zero tax even though the taxable interest exceeds the £1000 Personal Savings Allowance.

Aforementioned 6500 plus
State Pension 10000
Yearly Income 16500

Taxable Income of DB Pension + State Pension would be 15000.
£1000 PSA remains
Starting savings is reduced from 5000 to 2750, so the 500 over the PSA allowance would remain untaxed.

Have I understood this correctly?

Thanks in advance

[mc2fool]

Re. Self Assessment. Does the Starting rate for savings 5000 allowance get automatically applied during the self assessment calculation?

Yes. If doing it online you'll see it in the detailed "View your calculation" breakdown before you submit it.

Starting savings is reduced from 5000 to 2750, so the 500 over the PSA allowance would remain untaxed.

Have I understood this correctly?

Almost. It's reduced to £2570, being 5000 - (15000 - 12570). I assume your 2750 is just a typo. Otherwise, yes, that's correct.

[Lootman]

Re. Self Assessment. Does the Starting rate for savings 5000 allowance get automatically applied during the self assessment calculation?

Yes. If doing it online you'll see it in the detailed "View your calculation" breakdown before you submit it.

Starting savings is reduced from 5000 to 2750, so the 500 over the PSA allowance would remain untaxed.

Have I understood this correctly?

Almost. It's reduced to £2570, being 5000 - (15000 - 12570). I assume your 2750 is just a typo. Otherwise, yes, that's correct.

Are dividends also "protected" by this £5,000 Savings Allowamce?

Or for this purpose is it only interest that is considered to be savings income rather than normal income?

[mc2fool]

Yes. If doing it online you'll see it in the detailed "View your calculation" breakdown before you submit it.
Almost. It's reduced to £2570, being 5000 - (15000 - 12570). I assume your 2750 is just a typo. Otherwise, yes, that's correct.

Are dividends also "protected" by this £5,000 Savings Allowamce?

Or for this purpose is it only interest that is considered to be savings income rather than normal income?

No. Yes.

https://www.gov.uk/apply-tax-free-interest-on-savings

[airbus330]

Re. Self Assessment. Does the Starting rate for savings 5000 allowance get automatically applied during the self assessment calculation?

Yes. If doing it online you'll see it in the detailed "View your calculation" breakdown before you submit it.

Starting savings is reduced from 5000 to 2750, so the 500 over the PSA allowance would remain untaxed.

Have I understood this correctly?

Almost. It's reduced to £2570, being 5000 - (15000 - 12570). I assume your 2750 is just a typo. Otherwise, yes, that's correct.

Thanks, that's cleared up something I've been trying to clarify from HMRC documents for ages. And yes, my typo