Structure your savings to minimise your tax bill

If you have cash savings that are not sitting in a tax efficient wrapper, like an ISA or your pension, you need to be careful that you do not incur a tax bill. Every UK taxpayer has a personal savings allowance of £1,000 in a given tax year , if they are basic rate taxpayer, and £500 if a higher rate tax payer.

Depending on your income, you may also benefit from the 0% starting rate on savings. For example, if you are not working or are not fully using your £12,570 personal allowance, what you can earn each year without paying tax, it is possible to enjoy your savings income tax free up to £18,570, in addition to any interest on savings you enjoy via ISAs. This £18,570 is made up of your personal allowance of £12,570, the personal savings allowance of £1,000 for basic rate taxpayers and the £5,000 nil rate band for savings income.

However, if you do receive other non-savings income, like a pension, you are employed or you receive rental income, the nil rate band may not available to you and you may be wondering what else you can do to help minimise your tax bill and to protect your hard earned savings.

Using the tax-free savings band as a couple

Alfred and Freda are both retired.

Alfred has a pension of £20,000 a year. He has also accumulated savings over the years, of £450,000 which generate gross interest of £4,500 a year.

Freda has a pension of £12,000 a year.

By transferring at least £350,000 of Alfred’s savings (on which interest of £3,500 is received) into Freda’s name, their savings income as a couple will be tax-free.

The first £500 of their savings income will be covered by the remainder of Freda’s personal allowance and the remaining £3,000 will fall within Freda’s tax-free savings rate band.

Had all the savings income remained in Alfred’s name, the interest in excess of his personal savings allowance of £1,000 would be taxed at 20%, generating a tax bill of £700 (£3,500 @ 20%).

To ensure that the opportunity to benefit from tax-free savings income is not wasted, couples should review their affairs to ensure that their savings are held so as to make the best possible use of the available allowances.

Save a hefty tax bill by splitting savings income as a couple

Janet and David are both retired.

Janet has savings income of £40,000 in the current tax year. As she has only savings income, the first £18,570 (representing her personal allowance of £12,570, her personal savings allowance of £1,000 and her savings rate band of £5,000) is tax-free. The remaining £21,430 is taxed at 20%, generating a tax bill of £4,286.

David has no income.

If they put the income-generating investments in joint names (or transfer half to David), each will be treated as having savings income of £20,000.

Both David and Janet will benefit from their personal allowance of £12,570, the personal savings allowance of £1,000 and the savings band of £5,000, leaving them each with taxable savings income of £1,430 and a tax bill of £286.

By equalising their savings income, their joint tax bill is £572 rather than £4,286, saving them £3,714 in tax.