Taxes to pay on Saving income and alternatives.

[david]

- someone inherits sum 400k and places in 5.2% annual saving account - 20800 interest saving
- no other income, all investments held in Lisa, ISA and trading account (no dividend shares)

1. self-assessment seems needed as interest above 10k - never did SA before, will he get notified is needed by hmrc and hence waited or do it proactively?
2. how much tax is liable here? 20% of the excess of what threshold?
3. are there any other "100% safe" options could be a more tax efficient vehicle?

thanks in advance!
d

[mc2fool]

1) Proactively. He must register for SA. https://www.gov.uk/check-if-you-need-ta ... nvestments

2) £446. 20% of £2230, being £20800 - £12570 (personal allowance) - £5000 (starting savings allowance) - £1000 (personal savings allowance) https://www.gov.uk/apply-tax-free-interest-on-savings

3) Low coupon short term gilts for the £42884ish generating the £2230. Start here: viewtopic.php?p=597837#p597837

[XFool]

2) £446. 20% of £2230, being £20800 - £12570 (personal allowance) - £5000 (starting savings allowance) - £1000 (personal savings allowance) https://www.gov.uk/apply-tax-free-interest-on-savings

I never seem to understand this: Why "-£5000 (starting savings allowance" ?

Tax-free savings & the starting savings rate

https://www.moneysavingexpert.com/savings/tax-free-savings/

"If you earn less than £18,570 a year from income and savings interest, then all your savings interest will be tax-free thanks to tax-free savings and the starting savings rate."

£20,800 pa in interest is above £18,570.

OK. This?

"The amount you have as income – for example, from a job or a pension – affects whether your savings interest is tax-free. Let's take the three main scenarios for non-savings income..."

"You earn less than £12,570. Here it's fairly simple. You benefit from both the £5,000 starting savings allowance – where you pay 0% tax, plus the personal savings allowance of £1,000. So, you can earn a total of £18,570 from income and savings interest without paying any tax."

[mc2fool]

2) £446. 20% of £2230, being £20800 - £12570 (personal allowance) - £5000 (starting savings allowance) - £1000 (personal savings allowance) https://www.gov.uk/apply-tax-free-interest-on-savings

I never seem to understand this: Why "-£5000 (starting savings allowance" ?

Tax-free savings & the starting savings rate

https://www.moneysavingexpert.com/savings/tax-free-savings/

"If you earn less than £18,570 a year from income and savings interest, then all your savings interest will be tax-free thanks to tax-free savings and the starting savings rate."

£20,800 pa in interest is above £18,570.

OK. This?

"The amount you have as income – for example, from a job or a pension – affects whether your savings interest is tax-free. Let's take the three main scenarios for non-savings income..."

"You earn less than £12,570. Here it's fairly simple. You benefit from both the £5,000 starting savings allowance – where you pay 0% tax, plus the personal savings allowance of £1,000. So, you can earn a total of £18,570 from income and savings interest without paying any tax."

"For every £1 of non-savings income you earn above your personal allowance, you lose £1 of your starting savings allowance"

The OP doesn't have any non-savings income.

[scrumpyjack]

and at 4% inflation the £400,000 has lost £16.000 in real value in that year! (hands up who thinks inflation really is only 4%!)

[Lootman]

1) Proactively. He must register for SA. https://www.gov.uk/check-if-you-need-ta ... nvestments

Must he? As best I recall I never "registered" to submit a SA return, "proactively" or not. I merely submitted a return when I first figured out that I needed to.

It was a long time ago so my memory is fuzzy. But I am fairly sure I never registered at any time. I just keep sending them a return every year and, should I no longer need to do that, I would simply stop submitting them.

In the OP's case I would second your idea of putting some funds into short-dated gilts trading under par, to avoid the need for SA altogether.

[mc2fool]

1) Proactively. He must register for SA. https://www.gov.uk/check-if-you-need-ta ... nvestments

Must he?

That's what the link above says. Maybe that's new since your "long time ago"...

In the OP's case I would second your idea of putting some funds into short-dated gilts trading under par, to avoid the need for SA altogether.

That won't avoid it unless he gets his annual interest income down to below £10K, but if he does that he'll end up with a lower net return 'cos gilts only offer better net returns than savings accounts when the savings a/c interest will be taxed, but only £2230 of their £20800 interest is taxed.

[Lootman]

Must he?

That's what the link above says. Maybe that's new since your "long time ago"...

Maybe but I would be curious as to what the punishment is for submitting a correct and timely SA return without having previously and proactively registered in advance to do that?

After all you may not realise that a SA return will be needed for a given tax year until the SA return for that year is due anyway. So if you just send it in without pre-registering, what bad thing happens?

[mc2fool]

That's what the link above says. Maybe that's new since your "long time ago"...

Maybe but I would be curious as to what the punishment is for submitting a correct and timely SA return without having previously and proactively registered in advance to do that?

After all you may not realise that a SA return will be needed for a given tax year until the SA return for that year is due anyway. So if you just send it in without pre-registering, what bad thing happens?

My guess would be that it gets rejected for lack of a UTR, Unique Taxpayer Reference, which is the very first field on the form, with a letter by return that tells you so and that you get a UTR by registering.

HMRC is a bureaucracy, don't expect them not to be bureaucratic.

[kempiejon]

I have been inspired to wrangle my tax affairs to benefit from this extra allowance so I've wondered how the tax is paid. Hoping I could manage something similar to when I paid dividend withholding tax which I managed to pay online without UTR nor SA. Unfortunately that method has disappeared from the HMRC website. WFH modified my tax code around the same time I paid the dividend tax and HMRC included the previous year's dividend tax due but that was the wrong number and I corrected that online with a webchat and debit card.

[daveh]

Maybe but I would be curious as to what the punishment is for submitting a correct and timely SA return without having previously and proactively registered in advance to do that?

After all you may not realise that a SA return will be needed for a given tax year until the SA return for that year is due anyway. So if you just send it in without pre-registering, what bad thing happens?

My guess would be that it gets rejected for lack of a UTR, Unique Taxpayer Reference, which is the very first field on the form, with a letter by return that tells you so and that you get a UTR by registering.

HMRC is a bureaucracy, don't expect them not to be bureaucratic.

A few years ago I made an unexpected capital gain from some shares in a private company that I have a beneficial interest in. I only found out in December when the tax needed to be paid at the end of the month for paper or end of January for online, but I hadn't done a tax return this century. There is a specific capital gains service online, but it didn't work in my situation as I had other capital gains and loses that wouldn't have needed reporting except for the unexpected gain. HMRC said I needed to do a SA they sent me a letter to that effect and a paper return and gave me a couple of extra months to do the return. In the end I did it online after registering for a government gateway account and got it in and paid the tax before 31st January.

So if you sent it in close to the last date they might well just send you a paper return and give you some extra time.

[Lootman]

My guess would be that it gets rejected for lack of a UTR, Unique Taxpayer Reference, which is the very first field on the form, with a letter by return that tells you so and that you get a UTR by registering.

HMRC is a bureaucracy, don't expect them not to be bureaucratic.

A few years ago I made an unexpected capital gain from some shares in a private company that I have a beneficial interest in. I only found out in December when the tax needed to be paid at the end of the month for paper or end of January for online, but I hadn't done a tax return this century. There is a specific capital gains service online, but it didn't work in my situation as I had other capital gains and loses that wouldn't have needed reporting except for the unexpected gain. HMRC said I needed to do a SA they sent me a letter to that effect and a paper return and gave me a couple of extra months to do the return. In the end I did it online after registering for a government gateway account and got it in and paid the tax before 31st January.

So if you sent it in close to the last date they might well just send you a paper return and give you some extra time.

Yeah I would have thought that the registration thing is just for doing online returns, and not for the conventional submission of a paper return.

I thought that I did not have a UTR as I have never registered. But I see a UTR on my paper return so I can only assume that my accountant set that up. I still have no online HMRC account so I know for a fact that they are not necessary.

I have been paying taxes since 1975 so the taxman definitely knows about me, UTR or not!

[XFool]

I thought that I did not have a UTR as I have never registered. But I see a UTR on my paper return so I can only assume that my accountant set that up. I still have no online HMRC account so I know for a fact that they are not necessary.

Correction. You do have an online HMRC account (you are a UK taxpayer). Whether you, or your accountant, use it or not is another matter.

Or does it not exist unless set up by an individual - via NI No? Getting a bit philosophical now: "If a tree falls in a forest..."

[Lootman]

I thought that I did not have a UTR as I have never registered. But I see a UTR on my paper return so I can only assume that my accountant set that up. I still have no online HMRC account so I know for a fact that they are not necessary.

Correction. You do have an online HMRC account (you are a UK taxpayer). Whether you, or your accountant, use it or not is another matter.

Or does it not exist unless set up by an individual - via NI No? Getting a bit philosophical now: "If a tree falls in a forest..."

Let me put it this way. I have not set up an online account in the normal sense of that phrase.

Typically that involve providing an email address or unique username, choosing a password, giving a phone number for 2FA, choosing a personal question/answer e.g. name of my first pet, maybe uploading an ID document or photo, and so on.

Now if HMRC wants to give me a notional number or "account" for their own purposes then fine. But I can ignore it. They already have my NIN which uniquely identifies me. And name, address and DOB is fairly unique!

[BobGe]

£5000 (starting savings allowance)

Please excuse me for being in pedant mode, but this £5k is not an allowance.* This £5k (where the full amount is available to the individual taxpayer) is taxable, but the rate applied, called the "starting rate" is currently set at 0%. Only the first £1k of savings income (where the full amount is available to the individual taxpayer) is an allowance. (*This is often mis-stated, as in the moneysavingexpert quoted example.)

I appreciate that this doesn't affect the outcome in the o/p's case (or perhaps anyone else's for that matter) but the starting rate could be increased, whereas the allowance is unlikely to be reduced.

[mc2fool]

£5000 (starting savings allowance)

Please excuse me for being in pedant mode...

Ah, well, should we excuse picking at nits? Didn't our mothers tell us not to do that.

... this £5k is not an allowance.* This £5k (where the full amount is available to the individual taxpayer) is taxable, but the rate applied, called the "starting rate" is currently set at 0%.

The rate is the percentage of tax levied you say? Well let's see what the trusty (?) .gov page linked to in my OP, https://www.gov.uk/apply-tax-free-interest-on-savings, says...

"Starting rate for savings

You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings."

That says the rate is the up to £5,000. What's more it goes on to say:

"The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be."

So if the rate is the percentage of tax levied, and it starts at 0%, that would mean that as you earn more it'll go negative! What, and then they'll give you money?

Ok, ok, I'm being tongue in cheek here. Clearly that .gov page needs a pedant's review. But then what is the up to £5,000 properly called? The band? Range? Tranche? I know, let's see what the HMRC internal manual says....

"Savings income is taxable at the basic rate, except where it falls within the ‘starting rate limit for savings’ (for 2019-20 this amount is £5,000 - ITA07/S12) or is covered by the personal savings allowance (see below). Where it does so, income tax is charged at the ‘starting rate for savings, which is 0% (ITA07/S7)." https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim1080

Alright! So, the up to £5,000 is the starting rate limit for savings and the rate is 0%. Now that's clear!

But wait, the page goes on to say: "From 2016-17 savings income not within the starting rate for savings...", umm, shouldn't that be starting rate limit for savings? "... may be covered by the personal savings allowance and charged to tax at 0%."

Aha! So an allowance is an amount that is taxed at 0% after all! HMRC sez so. QED.

[BobGe]

Well, I'm glad to see that's now clear to you!