Paying tax on savings

[PinkDreamer]

I’m currently saving for a deposit for a house. I’m the first in my family to do so and the first to have any sort of savings. I’m aware that I have to pay tax once my savings reach £20,000. I’m close to hitting this amount. However, approximately £6000 of this is currently is a LISA. Am I correcting in thinking that this money doesn’t count towards the £20,000 limit? I’m sure I read that money in ISAs doesn’t count but unsure if this includes LISAs. Also how do I pay the tax once I hit £20,000?

I think you are muddling things up?

You pay tax on interest on savings, not tax on the savings themselves. And only above a certain tax free amount anyway.

Savings caps apply to benefits claiming.

There isn't a £20,000 limit for tax on savings. You pay tax on the interest earned on savings once it exceeds your savings allowance which is £1000 from basic rate tax payer. You dont pay any tax on interest earned on any sort of ISA.

Are you getting confused with the ISA 20k limit that you can put in for tax free savings?

Well done on having so much saved!

Previous posters are right, you pay tax on interest earned rather than the savings themselves. Any interest earned on money saved in an ISA / LISA doesn’t count when working out how much tax you have to pay.

The limit on how much you can earn before paying tax depends on how much you earn. Broadly, if you earn under £50k and only pay tax at 20% you can earn £1000 in interest before needing to pay any tax. Higher rate tax payer and this drops to £500. And the period they calculate this on is the tax year - April to March.

As for what you have to do if you’ve exceeded these limits in order to pay the tax due, I’m not quite sure, but hopefully someone else can help.

It may be worth trying to move some in to a cash ISA to avoid any tax, but obviously only if the rate you can earn there is better than the rate less tax that you’re currently earning.

I may absolutely be muddling things up. As I said I’m the first in my family to do so I’ve had to do a lot of research and it’s quite confusing at times. Thanks for your help!

Thanks so much! This is really helpful :)

OP isn't completely wrong - yes the tax is on the interest rather than the savings themselves but there are lots of savings accounts that are close to 5% interest now, or even more.

If she did have the £20,000 in one savings account that would earn approximately £1000 interest a year so then anything over that OR slightly less if you had a slightly higher interest rate (e.g. 5.1%) she would become liable for tax on everything over the £20k.

In OP's case because £6k is in a LISA which should be exempt from tax, you would have to be earning 7.2% for your remaining £14k to earn more than £1000 interest. So at the moment you're fine, but depending on the exact interest rate, as you save more, make sure to keep less than £20k in a 'normal' savings account and put the rest into the LISA or premium bonds.

and of course this is all assuming you are a lower rate tax payer - if you're a higher one you'd only need £10,000 of savings at 5% to be earning enough interest to then be taxed on anything over.

Thank you for this. I knew I’d seen something about the £20,000. I’ve just checked and my savings account interest is 1.2% so I don’t think I have anything to worry about just yet as this is lower than 5% so I won’t hit £1,000 in interest on the savings yet. As you said, I will put some more in the LISA. Thanks for all the help!

You could earn a lot more than 1.2% - check out alternatives or put into a cash ISA

I’ve just checked and my savings account interest is 1.2% so I don’t think I have anything to worry about just yet as this is lower than 5% so I won’t hit £1,000 in interest on the savings yet

If your LISA is only paying 1.2%, can you transfer it to a better paying account? You have to transfer ISAs not just withdraw money and open another account elsewhere to keep the ISA allowance/benefits.

If not, just put the maximum in the LISA to get the bonus, and then put any other savings in a better paying account - it's madness to stick to a low paying account to avoid tax. I think you're allowed more than one ISA now, as long as you stick to the £20k limit, but you can also get instant access accounts that pay around 5%, plus you have the £1000 tax free allowance. You could also use premium bonds, which are likely to pay out more than an account paying 1.2%.

It’s the normal savings account with the low interest. I’m not keeping the savings in a low interest account just to avoid tax. I simply set up a basic saving account linked to my regular bank account. It seems I have some more research to do and look for accounts with better interest. Thank you!

You definitely need to improve the interest rate. Nothing like compound interest for boosting savings. Well done for getting a grip on in things.

moneyfactscompare.co.uk/savings-accounts/

I think Martin MSE quoted the £20kish figure a few months ago as the amount you'd start paying tax on interest based on a standard savings account, maybe you saw it there? but absolutely you need to switch to a higher one, no point in throwing away free money!
14k @ 1.2% is £168 interest a year
14k @ 5% is £700 interest a year

ISAs are tax free

Therefore you pay zero tax on the ISA

Therefore you pay zero tax on all of the interest earned

You can put a maximum of 20k per tax year into an ISA per person

Example

Year 1
20K
10% interest
Total 21k all of it is tax free

Hope this helps ?

Look on Money Saving Expert for higher rates than 1% for ISA & LISA

https://www.moneysavingexpert.com/savings/best-cash-isa/#topeasy

Why on earth are you savings sitting in an account that pays 1.2%.
Put them in an easy access cash ISA
Just make sure you don't exceed £20000 paid in this tax year. Stick as much as you can into a cash isa keeping under the 20 and then open a proper savings account for anything further you save this tax year.