Tip One: Three allowances you could utilise before the start of a new tax year
The good news is that savings allowances can be used right up to the end of the tax year. What on earth does that mean you ask? There are two primary elements for savings tax in the UK: a personal allowance and an ISA allowance. We’re going to take a look at both of these and the benefit of utilising a tax allowance.
1. Your personal allowance
This is the amount of interest you can earn from savings before you need to pay tax on that interest. This amount is based on your income tax rate, and works as follows:
If your total earnings are less than £17,570, you have a starting savings allowance (tax free savings interest) of £5,000. If you earn over this, that £5,000 no longer applies. This is on top of your personal income tax allowance and Personal Savings Allowance. After this, the following rates apply.
- Income up to £0 – £12,570: Earn £5,000 in savings interest before paying tax.
- Income of £12,571 – £17,570: £5,000 tax-free interest allowance and an additional £1,000 of interest Personal Savings Allowance.
- Basic rate tax payer £17,571 – £50,270: The £5,000 rate no longer applies and the £1,000 Personal Savings Allowance remains.
- Higher rate tax payer £50,271 – £150,000: The Personal Savings Allowance is halved to £500.
- Additional rate £150,000 and over: No savings allowance.
The practical upshot of this is that you should manage your savings based on the point at which you will pay tax on the interest. Interest over any allowance is considered income, and could potentially move your tax bracket.
If you’re a basic rate taxpayer, it’s worth noting you’d need a very large sum in a standard savings account to reach the typical £1000 Personal Savings Allowance amount. With high street interest rates what they are at the moment, you’d need around £57,500 in savings before earning enough interest to pay tax.
What you need to do:
- If your savings are going to attract tax, then it may be wise to consider using that money in a different way. This means not leaving it in your bank account, which could lose you money. Now is the time to act if this is the case.
- There are other ways of saving money outside of your personal savings allowance that may be helpful, one of these is an ISA which we’ll review in detail below.
- It’s also a good idea if you have an overdraft or credit card balance to think about paying these down.
- Some people are keen to pay down their mortgage but there are some positive reasons why you might choose not to do that which you can speak to your financial adviser about.
- You’ll need to look at each applicable interest rate and work out how to make the most effective use of your savings.
2. Marriage allowance
The marriage allowance for married couples or civil partners means you can transfer £1,260 of your personal allowance to your married or civil partner. If one partner is under the personal allowance and the other over, this can yield a reduced combined tax bill of up to £252 in the tax year.
If you haven’t got time to do these things or are worried about paying tax on your interest, get in touch to see what we can do to help.