Tax

It is always a good idea to have some savings and to search for the most competitive interest rate. However, did you know that you could be charged tax on interest that you make from your savings even when they are held in cash accounts?

Due to a combination of historically low savings interest rates and the Personal Savings Allowance (PSA), tax on the interest received from savings doesn’t apply to most people at the moment. However, if interest rates rise or your earnings increase, you could be impacted by tax on savings interest even if you aren’t affected at the moment.

The amount of interest you are allowed to earn before you pay tax, relates to your Income Tax bracket. Basic rate tax payers get the largest PSA which decreases as you move higher through the income tax brackets.

Remember, this is not how much money you have in savings, this is how much interest you have earned from your savings. To give some context, a saver with £98,000 in a savings account paying 1% interest per annum would earn £980 interest in a year. If this individual is a basic rate tax payer they would pay no tax on this.  If you are either a basic rate or higher rate tax payer, it is likely you’d need a large amount of savings before tax becomes due on savings interest.  If you are impacted by tax on your savings interest, you could put some of your money in an ISA to protect it from tax. The next section looks at the allowances for ISAs.

Individual Savings Accounts or ISAs as they are more popularly known, are a way of growing your savings tax-free. Any interest earned inside an ISA doesn’t use up any of your personal savings allowance. For more information on ISAs see the ISA section under savings and investments.

You get a new ISA allowance each year, meaning that if you have hit the limit in one tax year, you get a brand new amount the next year. You can add savings up to the limit each year in a mixture of stocks and shares or cash ISAs. Your ISA allowance isn’t effected by how much you earn. Although there are different rules for children, every person age 16 and above has an annual ISA allowance currently set at £20,000 for the tax year. Any contribution made toward a Lifetime ISA (LISA) is included in your annual ISA allowance. For more information on LISAs visit the savings and investments page.

Dividends are payments received if you own a part of a company. They are most commonly earned either as payments from investments such as stocks or shares, or if you are a Director of a registered limited company. You have to pay tax on dividend payments once they reach a certain limit within the tax year. It’s also important to note that any payments from dividends could push you into a higher tax bracket if you’re already close with other earnings. The first £2,000 of dividends are paid tax free – anything above £2,000 is subject to tax. The amount of tax you pay depends on your income tax bracket. As you can see, the potential tax rates on dividends are significant, so proper tax planning is essential to keep more money in your pocket.

Capital gains tax is applicable when you sell ‘chargeable assets’ that have increased in value. A full list of chargeable assets can be found on the government website, with the most common assets being second homes, buy-to-let properties or shares that are not held in an ISA or LISA.

To work out if you have made a gain can be complicated, as you’re allowed to deduct certain costs from some chargeable assets. But in simple terms, a gain is the price you sold the item for minus any allowable losses, minus the price you paid for the item. If you think that you may be liable for capital gains tax when you sell an asset, it may be worth talking to a tax expert such as an accountant or regulated financial adviser to help you calculate this.

The first £12,300 of gains in the tax year are exempt from tax. Like your personal savings allowance and your dividend allowance, the rate of tax that you pay is dependent on your income tax bracket and what asset you have sold.  Any gains above the £12,300 tax free allowance are charged as follows:

Inheritance Tax (IHT) is a tax charge applied to an individual’s estate, usually at the point they die. There are two separate nil rate bands that may be applicable to an estate before calculating an IHT charge. These are the standard nil rate band and the residence nil rate band.

Everyone has the nil rate band which applies to all assets that you’re passing on. If you own your own home and plan to leave it to a direct descendant, you also get a residence nil rate band.