Tax on savings

[AbreathofFrenchair]

I earn £17,589 pre tax per year, working part time.

I put around £450 into savings in different accounts and they earn between 1 and 5 percent interest in each account per month.

My partner refuses to save as he would earn minimal interest and end up paying more in tax. He is horrified that I dont appear to pay tax on my interest.

Tbh I didnt realise I would be taxed on interest earnings and he is stressing that I am going to be hit with a huge tax bill and is urging me to fill in a self assessment and return it immediately.

My largest savings pot is my lisa which I've had for 7 years now and I pay in 300 a month, the Gov top up 25% of what I put in and interest is 1.25% paid yearly. I can only pay into this until I'm 50 then it will gain interest only until I'm 60 then I can start to use it, I assumed I would be taxed at this point.

Other savings accounts are general lmes at 1% that I put around 50 in each month and the last one is a round up account where whatever I spend gets rounded up, the difference goes across to this account and it pays 5% on balance at the end of the first year.

How do I declare this in order to pay tax and is my partner right that I might as well ditch savings as the tax will outweigh the benefits?

As a basic rate taxpayer, you pay 0% rate of tax on the first £1,000 per year of interest, and interest in ISAs isn't taxed at all. So unless you've tens of thousands of pounds in savings (outside ISAs) earning good interest rates, you've no tax to pay on interest.

I think you can earn £1k in interest tax free regardless of your earnings.

Also definitely keep saving - your partner sounds a bit daft.

Also definitely keep saving - your partner sounds a bit daft.

ISAs (including LISAs) are tax free. No tax on the interest and no tax when you take the money out. This is why you can only pay in certain amounts. They are not counted towards your taxable income at all.

For the rest of your savings interest, you get £1000 per year personal savings allowance. I’d probably say you’d have to have more than about 50k in savings to generate more than that amount of interest at the current rates.

You can also put up to 20k per year into an ISA (including your LISA allowance of 4k). Premium bonds are also a no risk tax free savings option to consider

So it’s highly unlikely you have more than £1000 taxable interest per year and therefore do not need to declare anything or fill in any forms or pay any tax.

However even if you did - you’d pay 20% tax, so you’d still get to keep 80%. Which seems worth it to me!

Nope, not correct.
*
• *Basic-rate (20%) taxpayers: can earn £1,000 in savings interest per year with no tax
• Higher-rate (40%) taxpayers: can earn £500 in savings interest per year with no tax
• Additional-rate (45%) taxpayers: £0 – they do not get an allowance.

Your partner clearly knows little or nothing about personal finance. I suggest you ignore him and teach yourself There is so much information avallable online

Please don't tie your finances to his, to be blunt he sounds a bit thick

MumOfNowGrownupKids, op earns less than £18k so I assumed basic rate.

It was the “regardless of earnings” but that the PP picked up on; it’s not regardless, it’s earnings-dependent.

Are you both paying into a private pension ?

It might be better to do this rather than putting the money into savings with a low rate of interest

Look on Money Saving Expert website under private pensions

This.

It is almost never 'not worth saving' because you need to have money available for annual and irregular expenses like replacing white goods, paying for other big purchases, insurances, Christmas, holidays etc etc.

On the matter of declaring the interest, each account will issue a statement at the end of the financial year. Keep all these and just check that you don't earn over £1000 in interest (spoiler: you almost certainly won't in the short term, but keep reading anyway) and you probably won't need to do anything more.

However, up to now, very few people will have earned more than their interest allowance due to low interest rates (if you've had 1% pa interest, you'll have needed to have £100k in savings to beat it, so this only applies to people with a lot of savings, or high earners who usually need to do a tax return anyway, which is how you declare it).

If interest rates keep increasing, the amount you need in savings to exceed the £1000 interest allowance will go down quite quickly - eg if normal accounts start paying 5%, you'll get £1000 interest if you have £20k in savings, which many more people will, especially if they are saving for a house deposit - but this will be overcome by people using their cash ISA allowance again, which has largely become redundant over the last few years due to poorer rates on ISAs and the £1000 allowance.

For teaching yourself about personal finance, Moneysaving Expert is an excellent resource. There's articles about just about anything you could imagine (savings, pensions, debt, budgeting, cutting expenses, coping as best you can with the cost of living crisis, house buying, etc etc) and a weekly email which gives ongoing tips and helps you learn about money in small weekly chunks.

Also Meaningful Money, which as well as the information on the website, has a podcast, youtube videos and a book. This is more about investments, but also covers the basics of budgeting and preparing for retirement, which is a lifelong journey.

Finally, I must ask, is there a reason you're working PT? If it's to bring up DC, you should be aware that this puts you in a vulnerable position if you're not married, although you do seem to be saving some extra towards a pension, which is better than many women who have limited their earnings compared to the father of their DC has done. Something else to think about.

Things changed in April 2016 when the Personal Savings Allowance was introduced. Before that you did have to pay tax on savings interest.