Although most things in life seem to be taxed nowadays, when it comes to your savings there are ways to make sure that you're not letting the tax man have any more than you have to. We explain what you can do.
Paying tax on any money you earn is an inevitable fact of life for most people in the UK. As the interest paid on your savings counts as part of your income, this will also be taxed by 20% (or 40% or 50% if you’re a higher-rate taxpayer).
This means that the interest you earn on your savings is automatically reduced by 20% before it reaches your account, and that 20% cut goes straight to the tax-man. The amount of interest you see on your bank statement therefore is always net (post-tax) rather than gross (pre-tax).
So that you’re giving away as little money as possible to the tax-man, it’s important to make sure you’re only paying tax on what you have to. We show you how.
Fill up your ISA allowance
It’s something that can’t be emphasised enough: by taking advantage of your ISA allowance, you can make sure that £11,280 of anything you save each tax year will remain tax-free.
You can save up to £5,640 as cash and the remainder in stocks and shares. ISAs act as a tax-relief wrapper meaning that any money you deposit in them will earn gross interest rather than net. That’s an extra 20% to be tucked away.
If you’re not currently using your ISA allowance, there’s no reason not to. Whether you have more than £11,280 to save or a fraction of that amount, it’s worth filling up your ISA allowance to get the maximum tax-free benefit before putting your savings elsewhere.
Only pay tax if you have to
Not everyone in the UK has to pay tax on their income. If you are not a taxpayer, i.e. your earnings are below the taxable threshold, then your savings should be earning interest without tax taken off.
The taxable threshold for those under 65 is £155 a week, for those aged between 65 and 74 it’s £201 a week, while for those aged 75 or over it’s £205 a week.
As such if you aren’t a taxpayer but have been receiving interest post-tax, you can fill in an R85 form to inform your bank or building society that the interest on your savings should not be taxed. The help-sheet that accompanies the R85 form gives you lots of useful information about who should and shouldn’t pay tax on savings.
Take advantage of your partner’s tax status
There are other tax relief options too for couples. If you’re part of a couple and you have to pay more tax than your other half on your savings, or vice versa, you can save your money in your partner’s name in order to benefit from paying as little tax as possible.
For example, if you are a higher-rate taxpayer and pay 40% of all your interest to the taxman, while your partner is a basic-rate taxpayer and only pays 20%, you can save your money in your partner’s name and both only pay the 20%.
However it’s worth noting that saving in this way means placing complete trust in your partner as your savings will be in their name instead of yours – so make sure you understand the implications of saving in your partner’s name before you go ahead.
Save tax-free for your child
If you are saving for your children it’s worth making sure the savings are taxed as little as possible. Open the account in your son or daughter’s name and as long as they aren’t earning over the tax-free allowance of £8,105, you can help them build up their savings without tax taken off. You’ll need to get your child to sign an R85 form to do this, or sign it on their behalf.
However it’s worth noting that such an account has to be opened only with the express purpose of saving for your child; otherwise more complex tax issues come into play.
There are also restrictions governing how much you can give your child without it being taxed. For example, you can give up to £3,000 to your child each year tax-free, so this is worth looking into if you want to make the most of your child’s tax-free status.
