Paying tax on interest from savings

[Moneyquery34]

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 😁

The only other thing I can think of is to pay for some things in advance at todays prices, instead of increased prices in 1, 2, or more years in the future

eg
Holiday
Funeral plan
Other suggestions ?

Just hurl it all into your pension using carry forward and the annual allowance.
https://www.gov.uk/tax-on-your-private-pension/annual-allowance
This is what I did some years ago - increased my pension contributions temporarily until my windfall was all safely in tax free wrappers, aside from the emergency fund.

If your pension is a defined-benefit one (final salary or career average salary pension) look to see if you can buy extra years. Regardless of what type of workplace pension you have, you can have a SIPP alongside that.

That may be enough to soak up all the inheritance, or at least enough so that your annual savings interest is under the personal limit. But of course next year you can bung some more into the ISA too.

Just see you earn £30k, Starting rate for savings is for up to £17570 income so you wouldn't be eligible

An Investment Bond has some tax efficiencies that might be worth considering as you have already used your ISA and pension allowances.

Thank you all

@FrontEnd My NI contributions are paid up, thanks. I'm not sure how much I could pay into my autoenrol pension to 'backfill' and I think I'd need help to work that out! I've looked at SIPPs and they might be an answer, but I do wonder if I'm concerned about tax on savings and yet I'd be paying charges for the SIPP...am I just being silly?

@PickledPurplePickle Yes I definitely do have unused pension allowances. Not loads but some.

@declutteringmymind I dont have any debts and thnak you for the NS&I suggestion. I didnt know that. I'll take a look.

@Morph22010 I think you're right. I'm not very good at sums (!) and I wonder if I'm focussing too much on NOT paying 20% tax on savings interest when the cost of doing that is minimal in the greater scheme of things. Martin Lewis talks about not paying tax on savings interest a lot so maybe I'm OTT about it??

@OttoGraph I am relatively risk averse. I'm 62 so I've not got lots of years to make up any fall ! And dropping my working hours is something I am thinking about. I work full time at the mo.

@ThankmelaterOkay I hadnt thought about doing something to the house. Thast quite a good idea although I'm conscious that as I get older I might need to move to a bungalow (hopefully not but you never know!)

@LightBlueJeans I own my house outright. I dont think I know much about offset mortgages. Thank you!

@LordEmsworth You make a good point. Sometimes, though, I get a bit cheesed off that the super rich manage to avoid tax to a large degree (if we believe what we read) and yet I'm jumped on because I have more than a £1000 in savings interest. Probably not my finest hour to think this way....but there we are!

@SilverOrchid Thank you! £70K is the inheritance amount. Not yet received. I'm alreday paying a little tax on my savings interest. I just dont want to pay any more if I can get away with it!

@943FavouriteStickers A funeral plan is a good idea! And I'll take a look at the Friendly Society, thanks

@Paperbagsaremine I have a vision of me standing very high up and chucking fivers at a pot! My pension is an auto enrol salary sacrifice.

Why are you worried about paying tax on your interest??
You will keep 80% of the amount and pay 20%
A couple of years ago, we were lucky to get 1% interest and now we get 3 or 4%.
You will still be better off.
All these avoidance of paying tax is just odd as you will keep a vast majority of the interest you earn.

Probably a bigger concern than tax on interest is the erosion of cash capital due to inflation. Of course you potentially kill both those birds with 1 stone by backfilling the pension allowances you were entitled to and did not use over previous years. (I'm assuming neither your pension fund or ISAs are cash based). Btw, on the subject of ethics, I'm not sure managing your finances within approved schemes and allowances is dubious in the least... Anyway, happy for your windfall and I hope it didn't arise from too sad an event.

I get what you're saying. But other people being twats doesn't mean we have to emulate them... Helping to fund schools, the NHS, social care etc is a good thing, worth the - what - £250 interest you'd pay on £50k in a 5% account...

^^this

This is going to be more relevant as the Capital Gains Allowance is dropping

If your pension is defined contribution and salary sacrifice then if you bung as much as possible in there (your company will still need to pay you the minimum wage!) you'll save NI too.

There will be charges on your company pension and a SIPP may well be cheaper. Depends how much you have invested, and sometimes, what it's invested in.

And of course you can transfer from one pension to another, in full or in part, to take advantage of whatever charging structure works best for you (I'm NOT talking about any "defined benefit" aka final salary type pensions here, as generally they are best kept as-is).

This is a good time to review your retirement savings in general OP. Where is all your money? What is it invested in? What are the charges? What are the tax rules for each wodge of money?
All sounds overwhelming, but spend quarter of an hour every day on answering all these questions and making a to-do list and it's honestly not that tough. The tax year runs from April to April so there's no huge rush.

You can use fixed rate, fixed term savings accounts to filter your savings over several years into your ISA.
If the savings are inaccessible until maturity, the tax isn't due the year it matures.

So at 4.5% interest

• keep £20K in cash savings then put it in an ISA in April 2024.

Year 0 - Interest £900; Tax due £0.

Put £20K in a 1-year fixed rate savings account maturing June 2024.
Year 1 - interest £900; Tax due £0. Put it in your ISA April 2025.

Put £10K in a 2 year fixed savings account, maturing June 2025
Year 2 - interest due £920. Tax due £0. Put this in your ISA April 2026.

Put £7K in a 3 year fixed saver, maturing June 2026
Year 3- interest due £988. Tax due £0. Put in your ISA April 2027

Put £6K in a 4 year fixed saver, maturing June 2027.
Interest due £1,155 interest due £ tiny. Transfer to ISA April 2028

Put £4K in 5 year fixed saver, maturing June 2028
interest due £984. Tax £0. Transfer to ISA April 2029

I think this will work, as I have done something similar in the past,
but do your own research!

...Meant to say it's important to choose savings accounts which you will have no access until maturity or the tax doesn't roll over.

@seekingasimplelife Thank you! Thats so helpful 😍

Do you value the welfare state / NHS / education?

Just pay the tax!

I’m usually 100% of the same opinion.

But not here. This is about £100s of pounds being saved through 100% legitimate and approved schemes: ISAs for example.

Especially if you are in the 20% tax bracket, why the fuck should you pay tax on interest, whilst some millionaire/billionaire has shell companies, tax avoidance schemes, etc etc that saves them millions?

This.

Focus on the best investment and you'll more or less make the same money after tax that an isa makes. So it's no different to putting it in an isa. Yes a bit of difference but not much really.

If you tie in for 9 months on a good interest then you can move 20k into next years isa and reinvest the remaining.

I'd carry on like this.

It sounds like you've exhausted all the tax free investments apart from pension. Which you may or may not want to be adding to.

Sorry haven't read all the posts so may have been covered but would any of below work:

Check if any unused pension allowances from prior years per PPs

If you definitely won't use for 5 years + you could invest in an index fund in a general investment account and use your capital gains allowance (b&b some into an ISA in a future tax year if you're approaching the limit?)

Put in a fixed rate savings account that pays the interest in a future year where your tax rate will be lower?

You can get 4%+ on some fixed term accounts - just pay the tax and depending on your marginal tax rate that might be close to an instant access interest rate on a net basis?

@Moneyquery34 remember you get a new ISA allowance each April so over 3 years you can put £60k in ISAs.

@seekingasimplelife has suggested an approach which sees you defer tax until you have most of the money in ISAs.

Thanks everyone. I'm really grateful for all your help. @seekingasimplelife I've searched and can't find those sort of accounts (interest paid at the end of term, not yearly)....are you able to point me in the right direction, please? Sorry to be a nuisance!

@Moneyquery34
Sorry, I have only just seen your last query!
If it's not too late - Any fixed rate savings that do not allow any access until the end of the term would be suitable, I think.

It doesn't matter if the product says that interest is calculated monthly or annually as long as you don't have access to it until the full term is up - then that's the year the tax liability becomes due.
Read the T&C's of each saving product to check the access. (If you are able to withdraw it before the term by paying a penalty, it will not be suitable).

Here's some accounts on offer from 1-year to 5-year fixed bonds, listed on Savings Champion website which I find is a good source of information for best-buy savings products.

https://savingschampion.co.uk/best-buys/personal/fixed-rate-bond

(Caveat - I'm not a financial adviser, so always do your own research and fact-checking).

Thank you so much. You're the best 🥰