TAX ON SAVINGS INTEREST: what you need to do

thanks to some massively increased interest rates over the last few years and potentially if you've also managed to build up a decent savings pot for the first time many of us will now be looking at paying tax on some of the interest we earn on our savings in this video I want to take you through some things you need to consider some of the options available to you first of all if you don't think you're going to be going to that limit yet but you might be and then also for people that already gone past that they've already maxed out their tax-free allowances first of all let's talk about those of you who think you might be getting there you think you want to take some action now to prevent that happening in the first place well the first thing we need to do is maybe rewind slightly and just check if you're actually likely to go over the taxfree allowance now there are a number of different allowances where get to Isis we get to premium bonds later on but the main thing that most of us need to be concerned with in fact the main reason why most of us haven't been paying any tax on any of our savings for a good while now is something called the personal savings allowance I have detailed that in another video so watch that one to get an idea of all the ins and outs of that but effectively what this personal savings allowance is is an amount of interest that you can earn every single year tax-free in a normal savings account so not in Isis not in premium bonds basically anything else that pays interest you can get a pretty sizable amount of interest every single year and despite as I say those rates going up and if you are someone who's managed to save more money over recent years has been difficult with the cost of everything going up as well but if you have got a decent size savings pot in a high paying account you still as a basic rate tax payer need to have more than 1,000 of Interest a year to pay tax on the interest above that amount still get that 1,000 tax free above that and I've got a little table where bring up here on the side this shows you kind of how much money you need to be having at some different sort of interest rate thresholds now a year ago let's say you were getting 3% in interest at best on an easy access account you need 33k more or less in order to get ,000 lots of money even now where an easy access account is paying around 5% you need 20K or if you had a fix around 6% again those are kind of behind us now but they were available a couple of months ago you're look at nearly 17 grand you need in savings just to get 1,000 of interest in total before you use up that allowance and to be fair most of the country most us we don't have that amount of money in savings now it's a slightly different story may be slightly more realistic though that you might go over your PSA if you are a higher rate taxpayer where you pay 40% tax these guys get a half uh the price of personal saving out is reducing half to 500 and then let's look at it now let's say you have got your money in a 5% paying account well 10K would actually get you to that £500 and if you have got in 6% maybe you fixed it then just over 8,300 would get earn you £500 in interest so then you might be thinking actually yeah it is more likely that I am going to go over my personal savings allowance and start paying tax on the savings I say above that threshold but but a lot of people it's still not going to be something to worry about okay so again this table just illustrative things are not going to be that simple sadly because you know How likely is it that you've had the same amount of money in a savings account for full 12 months in that Financial year to know exactly what you're going to get you probably would had money coming in and out you might have moved your money across to get different improved rates as you've gone along you might have some regular Savers you might have some fixes you might have some instant accesses whole number of different things so sadly to work out if you have got a decent amount of money you are going to have to go in and manually figure out how close you are to that threshold if you think you might beting close to it but you might be okay sadly if you're an additional rate tax payer you do not get PSA at all there's no personal savings Lance for you so you will be taxed on your savings so we'll come back to that answer in a minute that's some of the things you need to think about but you going to okay right fine never going to touch it I'm a basic rate taxpayer I'm not going to be get anywhere there I can get ,000 pounds of interest every year that's absolutely fine not going to be a problem what should get a pay rise because I say those different allowances £1,000 to 500 to zero they are dependent on your earnings and with those income tax thresholds which these PSA levels are based on being frozen until 2028 been frozen for a couple of years they could be frozen for another what four and a half years perhaps maybe even longer than that it could well be that when you get a pay hike you move up into one of those different levels so let's say you earn 50 Grand right now if you get a 1,000 pay increase suddenly you're ear £51,000 suddenly you're a higher rate taxpayer suddenly your PSA drops to £500 and suddenly any interest above that you're getting taxed at 40% rather than than 20% so it's something to to absolutely bear in mind particularly also again if you high earnout and you might move into that additional rate tax bracket the same thing will happen suddenly you'll lose a PSA completely and you'll be paying a lot more tax on all of your interest that you earn so that is something to kind of we'll come back to some of your options in a in a moment but that is something to think about as well not just what's likely to happen right now but also what's potentially could happen if your salary changes and that's not the only thing could change there's not necessarily any reason to expect these will happen but the rules could change as well some of the rules around the PSA maybe they could get rid of it maybe they could reduce it maybe uh some of the things we're talk about in a minute like Isis and premium bonds maybe some of the rules around that will change and maybe they'll change for the worse so it could well be you're thinking ah okay I'm not worried about maxing out my PSA right now but maybe I might be better off doing some things now maybe sacrificing a little bit of interest in order to protect my cash in some of those other taxfree rappers later on so again something else to consider and linked into that as well is whether you are expecting any kind of windfall maybe it's a bonus that's coming along maybe you are at setting your house your downsizing so you're going have some cashes left over from that maybe you're going to retire and suddenly you're going to have this big lump of cash that's coming in uh for you to spend these things as well coming in you might want to be thinking about doing something with money now before that happens if that's going to be in the next financial year I know we're away time to recall this we're away from that but you might want to be doing things now to try and reduce the potential later impact of tax on your savings so there you go so now hopefully in a position you know are you likely to go over your personal savings allowance this year uh and if something else changes could that force you into a different change of your PSA and things like that what then do what are you going to do well the Instinct I imagine if you're right if I'm going to go over my personal SA allowance I don't want to be paying tax on any of my interest ins thing would be let's put it in an Isa or a premium bonds in Isa any of the interest you earn in a premium Bond sorry any the interest you earn in an Isa is taxfree any the prizes you wi in a premium Bond they are also tax free so just whack the cash over there and in most part with Isis right now that probably is the best thing to be doing but there are some things to think about here first of all will you actually get a better return putting your money in an Isa versus keeping it where it is and paying tax on that additional interest most of the time at the moment you will okay but I just want to give you a bit of a couple of quick formulas simple formulas calculator on your phone will do it really simple you don't have to understand it will formulas will help you compare the iso rate and the non ISO rate with tax deducted so you can really get a kind of a proper comparison to understand actually which one is going to earn me the most amount of money because even a year ago it might have made more sense to have your money and pay tax on some other interest because you were getting uh the same if not a little bit more even after tax was deducted but these are the things you need to do there's a couple of different options for you um if you want uh you can take the iso rate that you've got and if you a basic rate taxpayer multiply by 1.25 if you are high rate taxpayer multiply by 1.6 six if it additional rate tax pay and multiply by 1.82 and that will give you uh the equivalent rate that you would need in a non- iser account to match what you have in an Isa okay so for example if the ISA has given you 4% and your basic rate tax payer at 20% you would need a different account paying 5% for the tax when it's deducted to match the same amount of money so if it was paying 4.8 there wouldn't be any point you'd be better off with the iset if it was 5.2 well then you be better off in the other account and having that tax deducted alternatively you can take the non ISO rate you've got and work out what that reduces to when tax is deducted and compare that one to the iso rate you found elsewhere so if you're a basic rate taxpayer you multiply it by 0.8 if you are a uh High rate taxpayer you multiply it by 0.6 and if you addition rate taxpayer you multiply by 0.55 some examples here let's say you have got a savings rate you're earning right now is 5% if you're a basic rate taxpayer that tax the interest you earn the effective rate you'll get on earnings above your PSA drops down to 4% if you're a higher rate taxpayer again 5% interest on a non-iso account effectively you'll be getting 3% if you're additional rate taxpayer effectively you're getting 2.75% on all of your savings simply because you don't get any taxfree allowance again you're thinking how does that compare to what I can get in an Isa and actually right now G every every day myself and the team we're updating Be Clever with your cash.com savings with the best buyer tables of all different accounts right now the best options would be to actually put that additional money into an Isa uh either for you get to reach that PSA or after you've gone over that with your interest move the money across so the the earnings after that would all be taxfree but it's not necessar always quite as simple as that with with an Isa because uh an Isa every single Financial year has an allowance of how much money you can put into it that's quite Hefty it's quite high it's 20,000 as we've established that's the kind of money that you have in savings right now might be actually meaning you earn enough interest to go over your personal savings allowance so that 202,000 you need to consider that because you can only put that much in if you have more than that well tough luck you can't put more into an Isa but you might also have other priorities which are more important for your ISO allowance because that ISO allowance isn't just for cash savings it is shared across all the different types of Isa lifetime Isa Innovative Finance Isa or stocks and shares Isa and you might decide that that is more important for your money particularly actually when it comes to investing people talk about investing about over a longer time a longer kind of period at least five years over five years your money hopefully no guarantee but hopefully then the um the returns you get on it they're going to be quite High because they're going to compound so year after year more and more will be happening year after year so when you actually come to realize those gains from an investment or stocks and shares Isa they could be quite high and they could be above the allowances the tax re allowances that come with Investments the capital gains tax allowance and the dividends tax allowance which were reduced in April 2023 they're going to be reduced even more in April 2024 so it might be better to focus your investing in your iset at the uh detriment of putting cash in there simply because you have got that PSA you have got other options for your cash savings there is another option where you can get taxfree Returns on your savings and that is premium bonds you can put up to £50,000 in premium bonds that isn't an annual allowance that is something that is just there ongoing so that kind of sticks at what it is but if you've got the money you put it in there anything you do with as I say will be taxfree and you could win up to1 million pounds you probably won't almost certainly won't but you know you could right so that obviously feels like that could be a really good option if as we said established at the top you know that you are going to go over your personal savings louts or don't even have one at all because your additional rate taxpayer and they absolutely are really good for that however I would always make sure this is something you go to after you've got enough interest to fill up that personal savings allowance and also uh enough you've used up your Isa allowance and that's because the uh prizes are not guaranteed with premium bonds you might not get anywhere close to the prize rate and as I showed in a video very recently when I compared the results for two different people who had the full amount 50k in premium bonds for a six month period their winnings their prizes were completely different and after that I had people telling me their stories some got more some got less there's such a huge range it really is down to luck so it's certainly something that I would go to after the others and the other thing you have to be wary of here as well is that the smaller amounts the fewer amounts of premium bonds that you have the lower the chances of winning because although you can buy premium bonds at just one pound and the minimum is 25 quid realistically if you do have 25 500 ,000 worth of premium bonds you there's still a very very low chance you're going to win anything at all you do need to be having tens of thousands of pounds in premium bonds to be getting closer to whatever the price prize rate is and therefore you might find that if it is smaller amounts of cash that we're talking about that you are better off having them in an account a normal savings account even if it is the interest is subject to tax because at least you're going to get something rather the likelihood is you'll get nothing again there's no rules here it's hard to say there is obviously a chance you could have one pound in premium bonds and win a million pounds obviously is possible just very unlikely so I would always ER to the side of actually have money over there pay tax on it um rather than chance St get nothing with those smaller amounts of savings one last thing to talk about though and we're talking about some really sizable amounts of savings here aren't we and established at the top that for a lot of people these figures are mind-blowing you know most of the country doesn't even have 500 in savings let alone 50,000 to put into premium bonds but if you are in a position to have a decent amount of cash maybe you're retired and you've moved it out of Investments out of Impe so we kind of bit more stable or maybe you've had a windfall or whatever it might be or you're saving up for something big the really question you to ask yourself is does it need to be in cash should I be worried at all about tax on interest anyway and that's because the general rule about how much money you need to have available to you in cash is well there's two things here there's 3 to six months worth of essential expenses this is where if you couldn't work you lost your job you were sick whatever it might be you could still pay the mortgage pay the rent pay the bills okay until you're well enough to go back to job or you found a new job okay that side of things 3 to six months you might want to do longer even if you're a freelancer you might want a bit more of protection there but generally 3 to six months is what he kind of thought about as a good sort of thing to have and then obviously there are those things that you might be saving for so maybe it's a wedding maybe it's a car any sort of big expenses or maybe just like a holiday in the summer whatever it might be again you want to have access access to that cach and have it all available to you uh to use more than that do you really need it in savings you might be better off putting it towards your pension you might be better off overpaying your mortgage you might be better off investing it and you do those things then that's a completely different matter and the tax on the interest isn't going to apply right now obviously there is a caveat in there that we have seen some very high uh fixed bonds over the last few months they are reducing at the time record this but you might thinking actually do that rather than invest for the long term but if you are thinking you don't need this money for a long term for that five six seven years 10 years 20 years whatever it might be if we're talking about retirement then having it avable to you in cash probably isn't the best thing to do with it my name is AD Webb thank you so much for watching this for more ways to get the most from your savings check out these videos right here

Channel: Be Clever With Your Cash

Views: 27,944

Keywords: ISAs, Premium Bonds, Personal Savings Allowance, tax on interest on savings account, tax on interest income of saving bank account, tax on interest income, tax on interest income uk, savings, high interest rate savings account, tax free savings account uk, tax free savings uk, tax free saving scheme, tax on savings uk, tax on savings, taxes on savings account, tax on savings basic rate, tax on savings higher rate, tax on savings additional rate

Id: bT4r7VNx9Nw

Length: 17min 2sec (1022 seconds)

Published: Sun Dec 10 2023