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Original poster

Paying tax on interest from savings

47 replies

Moneyquery34 · 01/06/2023 11:13

Hi all

I've changed my user name as this might be a bit outing for anyone who knows me.

I've had an inheritance which is lovely but I'm conscious that I will now be paying tax (20%) on the interest from my savings

There isnt much more that I can add to my autoenrolment pension (lowish salary - can only pay in up to my salary each year) and I'm all topped up with Premium Bonds and ISAs. I'm 62.

What would you suggest that I do with the money to avoid paying tax on my savings interest?

TIA 😁

OP posts:
WuTangGran · 01/06/2023 11:15

Buy Premium Bonds.

FrontEnd · 01/06/2023 11:17

Can you share 1) roughly how much and 2) how many years from now are you likely to need to spend it.

PickledPurplePickle · 01/06/2023 11:19

If you are topped up on ISA's and Premium Bonds your options are limited

Do you have any brought forward allowances on the pension that you can take advantage of?

User18538754 · 01/06/2023 11:19

If you are a low earner you could be entitled to the starting rate of interest up to £5k.

Original poster
Moneyquery34 · 01/06/2023 12:25

@FrontEnd Thanks for your reply. Around £70K. I might need it in the next 5 to 10 years.

@PickledPurplePickle Thanks - how does that work? I'm paying 30% into my Autoenrol pension at the mo and I earn £30K a year.

@User18538754 I've not heard of that?

OP posts:
FrontEnd · 01/06/2023 12:48

@Moneyquery34 OK. I would look into the following:

  1. check on track for 35 y NI contributions for full state pension (if not, fill gap years)
  2. look at backfilling previous 3(?) years if you not maxed out this is what @PickledPurplePickle is referencing I think. You may need to open a SIPP account depending on rules of your current scheme

Let me know if you have any leftovers. I'm assuming you have emergency cash fund of 3-6m net salary.

nahwhale · 01/06/2023 12:50

Can you pay some into your pension?

Or just pay tax on it?

PickledPurplePickle · 01/06/2023 12:59

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

I’m not a financial advisor so I would recommend speaking to one to see if you have any unused pension allowances available - it’s likely that you do

Tax on savings interest

You do not pay tax on your savings interest if you're on a low income.

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

declutteringmymind · 01/06/2023 13:06

ISAs
Premium bonds
Some NS and I bonds

All are tax free interest

SIPP contributions will bring your tax bill down.

Pay off any debts

LIZS · 01/06/2023 13:07

Isa?

Morph22010 · 01/06/2023 13:10

Put it in an interest free current account

but seriously you need to not just focus on saving the tax as that will not necessarily lead to the best investment

OttoGraph · 01/06/2023 13:10

Depends what your income is, if you earn under £17500 per annum then you get an allowance before you pay tax on interest from savings

You get a £2000 allowance on dividends, you could buy stocks and shares - but you may be totally risk averse. You could buy some stocks and shares

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

Tax on savings interest

You do not pay tax on your savings interest if you're on a low income.

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

ThankmelaterOkay · 01/06/2023 13:11

Is there anything you can do to your home to make it more energy efficient? Heat source pump, solar panels, insulation, new roof etc.

I’d invest some of the money in some things that will reduce your outgoings later down the line.

For example for me: I’ve got £3.5k left on my student loan, and also will easily exceed the £1k limit for this tax year (house deposit). So my student loan is 5.25%, and will rise to 5.5% soon. And then it looks likely it will sit at >5% until I pay it off. So I might as well pay this off rather than earn interest on the £3500 and be liable for tax.

LightBlueJeans · 01/06/2023 13:11

You don't mention what your housing situation is, but would an offset mortgage be worth considering? With a savings account linked to an offset mortgage you pay no tax on your interest from savings because you receive no interest on those savings. Instead, the interest you would have received on the savings is 'offset' against interest due on your mortgage. You can also dip into the savings as and when you need them.

OttoGraph · 01/06/2023 13:12

LIZS · 01/06/2023 13:07

Isa?

OP states she is up to date with ISA and therefore can't put any more money into ISA

DogInATent · 01/06/2023 13:12

Are there any debts you can pay off? - e.g. mortgage
Are there any home improvements you could invest in that would reduce your expenses? - e.g. battery solar

Have you spoken to an IFA about your options? - and if you're going to be paying tax on income you need to maximise that income.

OttoGraph · 01/06/2023 13:13

Could you reduce your working hours by one day as flexible retirement? that way reducing your earnings and thus your tax bill

Morph22010 · 01/06/2023 13:13

OttoGraph · 01/06/2023 13:10

Depends what your income is, if you earn under £17500 per annum then you get an allowance before you pay tax on interest from savings

You get a £2000 allowance on dividends, you could buy stocks and shares - but you may be totally risk averse. You could buy some stocks and shares

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

Everyone except additional rate taxpayers get a savings allowance it’s just drops down to £500 if In higher rate

dividend allowance is only £1000 now

LittleFreakJezebel · 01/06/2023 13:15

The lack of reading comprehension on MN never fails to amaze me!!

943FavouriteStickers · 01/06/2023 13:39

I believe if you buy & sell gold coins that is tax free as opposed to buying & selling gold

You would need to do some research first

Travelfan2021 · 01/06/2023 13:43

This reply has been withdrawn

Removed at poster's request due to privacy concerns.

943FavouriteStickers · 01/06/2023 13:45

Can you open another private pension, not linked to your employer?

https://www.moneysavingexpert.com/investments/

LordEmsworth · 01/06/2023 13:47

Google Personal Savings Allowance.

If you are a basic rate taxpayer, you don't pay tax on the first £1k of interest. (£500 if you're higher rate).

If you have put £20k into an ISA, however much into pension, and after that you have enough savings to get more than £1k interest per year - the ethical thing to do is pay your tax and be grateful that you are able to contribute in this way to the needs of society. I know that's not what you want to hear...

SilverOrchid · 01/06/2023 13:57

Lots of suggestions that you’ve already done here!

You mention £70k as an amount … I’m guessing this is the investment amount not the interest amount otherwise you’d be paying tax at 40% on some of your savings income? Is this the amount that is not in ISAs etc, or is this the total?

Given you mention 20%, I’ll assume you’re a basic rate tax payer. The first £1,000 of interest outside ISAs etc is tax free, and it’s only 20% thereafter. Assuming a generous 5% of £70k of savings, you’ll be generating £3,500 interest per year. £2,500 will be taxable - so £500 of tax.

Given you’ve maxed out all the ‘easy’ options, I’m not sure a £42 per month tax saving would warrant changing your investment strategy to things like shares which bring about more investment risk.

I assume that you’ve paid off mortgages/debt etc so you don’t have any interest costs.

Some of the NS&I fixed interest and index linked savings certificates are tax free.

You can also look at things like EIS/SEIS/VCT investments which are income tax reducers but risky and illiquid. Or you could make charitable donations which would give you gift aid tax relief, but that means parting with your money.