Question about savings and tax on them

[Welshy26]

Just sold my parents property and I have £70000 which I plan to put in a 1 year fixed rate savings account. Interest rate is 4.05%. When that 1 year is up, will I pay tax on the interest earned? Does anyone know? Thanks in advance.

If you are a basic rate taxpayer you can have up to £1000 of total interest before tax is due and if you are higher rate it’s £500, you have to pay tax on the interest above this, it’s not deducted by the bank anymore you have to report to hmrc

Also wondered about this. My parents reckon their tax code is adjusted to take account of their savings interest which is over the threshold but I don’t see how that would work, I would expect they should be filling in a tax return?

Put £20k in an ISA now, before end of tax year, and another £20k in an ISA after 6 April. Interest on ISA’s is tax free. According to Money Saving Expert there are some matching the 4.05%.

Then put the remaining £30k in a the savings act at 4.05%.

As pp said you can earn £1k in interest and the rest is taxed at your highest rate. So if you earn less than £50k - £30k x 4.05% = £1215 so 20% on £215 = £43 tax.

They only need to do a tax return is interest is above £10000. However it’s their responsibility to inform hmrc is the adjustment in the tax code is different to what the interest for the year ends up being

I'm not saying it's always right, but according to Gov.uk HMRC will still sort it out:

"If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.
If you complete a Self Assessment tax return, report any interest earned on savings there.

You need to register for Self Assessment if your income from savings and investments is over £10,000. Check if you need to send a tax return if you’re not sure.

@If you’re not employed, do not get a pension or do not complete Self Assessment, your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will tell you if you need to pay tax and how to pay it."

What's your tax rate? Depending on how much you earn, you could have a £1000 or £500 savings interest allowance.

But seeing as the interest will be about £2800, it's worth looking at alternatives, eg can you get an ISA for some or all of the money, which is tax free, and if you haven't already used your 2022/3 allowance, you could put £40k in over the next few days (this tax year and next from 6/4). But I don't know if there are any ISAs with sufficiently high interest to work out better.

You could also put some of it into premium bonds, the prizes are tax free and the payout rate is 3.3%, which you should achieve, and could get a lot more, if you're lucky.

Or you could just pay tax on the interest (I don't know how this works, it's only recently become an issue again for most people) as that could still be the best way, especially if you're a non or standard rate tax payer.

Santander have a one year fixed rate Isa of 4.15% - better than most savings accounts at the moment. Get one now and put 20K in now, 20k after the tax deadline. That will keep everything in there tax free.

For the rest, it will depend what tax band you are in for your other income tax - as that impacts how much interest you can make in a year tax-free.

If you are a low earner, you could potentially benefit from the starting rate for interest which can be up to £5,000 if your income is a maximum of £12,570 a year and will then reduce accordingly, so at £17,570 you will no longer get any. This is on top of the personal savings allowance.

@ScandiNoirNuit Your parents are correct. Financial institutions report to the interest paid to HRMG . Tax codes are adjusted accordingly. In other words you pay the tax on your savings by receiving less on your salary or pension.

Santander isa is 4.25% for 18 month fixed. You can sort it online in about 10 mins.

Thanks @florentina1 - good to hear!

You haven't got much time left in the tax year to sort it, but at others have said ISAs this year & next - maybe in your own and spouse's name (if comfortable with the effective gift and bringing the inheritance into the marital assets).
If money outside an ISA consider splitting so part in a monthly interest account (so effectively all interest in 23/24) and part in a 1 year + fixed rate opened after 5/4/23 (so pushing the interest into 24/25).

Do you have a medium term plan for the funds?
Some sort of investment?
Pension might be another good call, but depends on your situation.