Tipping over personal savings allowance

[GlitteringFeeling]

I’m trying to bring some structure to my savings, and I’m getting a bit stuck on how much I should try and avoid tipping over the Personal Savings Allowance with interest earned.

I’m a higher rate tax payer, so PSA of £500. ISA is maxed out for this tax year.

I’ve recently opened a regular savings account I put £150 in per month with current interest rate of 6.17%.

I was looking at some 6 month, 1 year, 2yr etc fixed bonds/savings to put £8000ish into a combination of different maturity dates. And finally I have some old savings accounts accruing £60ish a year in interest currently.

Am I overthinking going over £500, because although I pay 40% tax on that interest over £500 it’s still worth it?

MoneySavingExpert seems to lead you down trying to keep under the PSA, so I’m wondering if I’m missing something!

I’m early 30s, no children. Savings goal is shorter term, to build up savings to move up property ladder in next 3-5 years. Pension already has 27% of salary going into (employer contribution and mine combined). Mortgage being overpaid.

any advice/considerations would be welcome!

From the figures you've given it doesn't sound like you'd be massively over the £500 limit anyway?

The regular saver would produce £55.53 after 12 months, and you say about £60pa on existing accounts. If you invested £8000 at 5%pa that would produce £400. Giving total interest of £515.53 or thereabouts.

So you'd pay tax of £6.20. I think you're overthinking it. After using your PSA 5%pa gross becomes 3%pa net to you which is still a massive improvement on what's been available in recent years.

Thank you - yes the above was the conservative figures, but I think you’re right that it’s not worth worrying about.

I wasn’t really thinking about it until I read the MSE information and then wondered if I was missing something! So just wanted a sense check really!

Depending on your mortgage rate, you could overpay that by more than currently, to keep a lid on your savings. A lower mortgage will still help you move up the ladder in the future, by increasing your equity instead of the savings you can put towards the purchase.

Another thing to look at would be premium bonds. It could well be that you're only just over the £500 this year, but if you continue to accrue savings outside your ISA allowance, you'll be over it by a larger amount next year. So maybe stick a lump into PBs instead (it's generally not worth having smaller amounts but if you have around £10k+ you should get a similar return to the stated payout rate).

I'm in a similar position - my salary is currently only just below the higher rate threshold, but I've had quite a bit of back pay this year from last tax year, which has artificially inflated my salary this year compared with what it will be next tax year.

Current unknown is that I'm expecting a pay rise that's not yet been announced and if it's at the upper end of the estimate, I could tip over into the higher rate band and face losing half my PSA so could pay quite a bit more tax on my savings - if this happens, I'll open a SIPP and put in the necessary amount to avoid this.

Use a savings ladder to avoid savings tax on interest altogether.

The tax on interest on fixed-rate savings (just those which you have no access until maturity) is not due until the tax year it matures. Building a savings ladder of different maturity tax years is a good strategy for tax efficiencies, enabling you to filter the savings into ISAs over several years.

So for instance a 2-Year fixed rate savings bond which matures in 2025 would not be liable for any tax until maturity in 2025 - by which time other savings maturing in previous years, will have been transferred to new ISAs in 2023/24, and 2024/25.

Have you looked at ISA‘s? They’re tax free and you can put £20k a year in.

I would probably put some in premium bonds, they are tax free

@seekingasimplelife thanks, that's something I forgot to mention, if you take out a fixed rate product, all the interest is counted as if it's earned on the maturity day, whereas some instant access accounts pay interest monthly, so all your interest is earned as you go along, so can make a difference if you're above the allowance.

thank you all for your inputs - lots of food for thought!

@BarbaraofSeville @seekingasimplelife I actually was playing around with laddering, which is when I started to wonder if I was overthinking it all as I realised I needed to add in my old savings accounts (which are earning more interest than I realised). But yes, I am considering a mix of 1yr, 2yr etc fixed for that reason. So thanks for reinforcing that thinking!

I’ll take another look at overpaying the mortgage some more - I’m on a fixed rate of 1.8% until next July

@buckingmad - I’m already using my ISA allowance, but good reminder for others!

@User265438765 @BarbaraofSeville Didn’t think of premium bonds - thanks for reminding me!

Don't bother with premium bonds or overpaying your mortgage. You'd likely get a better return than both of those things just by keeping the money in a high interest savings account and paying the tax.

Recommended watch on premium bonds and why they are not a good investment vehicle

Would owing extra tax on your savings be the difference between filling in a tax return and not? That'd put me off going over the limit if so!

Tax returns aren't difficult. If all you need to declare is untaxed interest, it's probably a 10 minute job, once you've correctly set up your Government Gateway.

Would definitely be worth it to avoid overpaying tax on savings, which could possibly be worth hundreds of pounds. If I offered you £200 for a 10 minute job that you could do at a time of your choosing within a 10 month window, you'd take it, right?

On the matter of premium bonds, I think they can be worth it as part of a wider portfolio of instant access savings as long as you've thought about how much you need to keep in instant access, want to save tax on interest and understand you're gambling the guaranteed return in a savings account for the very small chance of a higher return.

If you need to save money to pay a tax bill, pay for home improvements or a car in the next < 5 years or are stoozing, you could need to be saving £10/20/30k+ with instant access so will be at risk of exceeding your PSA, so worth looking at.

Or if those things aren't relevant, you probably don't need a huge amount in instant access so won't risk exceeding the allowance.

Of course you could equally decide to put some or all of it in a fixed term account and pay the tax. It might work out more profitable, it might not. Every month thousands of people win thousands of pounds on PBs and if you're not in it, it won't be you.

You don't need to fill in a tax return if savings interest is under, I think £10,000, and you are on PAYE, HMRC adjust your tax code the following year. The banks report the interest to HMRC, it was on my online tax account so they know how much it is, obviously I would check it was correct like I would tax from earnings.

DH has premium bonds as part of a wider portfolio of savings. I don't as my income is very low so I can make use of the extra interest I can get from the starting savings rate for earners below £17570 before paying tax on it.

Buy U.K. govt bonds with a very low coupon rate. You can get January 2025 bonds with 0.25% interest for 93p. In January 2025, they will be redeemed at 100p. The capital growth in bonds is not taxed, so this results in around 5% p.a. tax-free. They can be sold in-between if you need the money earlier.

I'd overpay the mortgage because you'll be remortgaging to a higher % next year. The more money you can reduce, the less interest you will pay back on the remaining amount.

Pensions are the most tax efficient savings....

Interesting strategy - Does the commission on purchase still make it worthwhile and not wipe out the benefits?