tax paid on interest earned

[Cheshire Cat]

I've been contracting just over a year now, and for the first time in my life, I have no debts (save the mortgage) and I'm starting to build some savings.
Ignoring the stock market, and any potential "bargain" shares that may be available, let's assume, I let my money sit in a cash savings account.
I am a higher rate tax payer, in that I pay myself a 10k salary, pay no interest on the first 30kish divs, then 25% tax on all divs above this.

My question is, what %age tax do I pay on any interest earned from cash in the bank (personal, not business account)?
Is it 40%, 25% or other?
So, assuming I have exactly 10k in the bank for a year, and the interest is 4% I'd earn £400 gross. I understand that banks will take basic rate tax at source, and for higher rate taxpayers, you must calculate the difference on your SA return, is that right?

In this case, I'd earn £312, as the bank would take 22% (£88) of the £400 interest, so presumably I'd need to pay a further £72 to HMRC to make up to the 40% (£160) tax.

Are these calcs correct?

[AlanR]

I've I understand that banks will take basic rate tax at source

My bank - Alliance and Leicester - doesn't tax me on the inetrest earned on my Business Current Account or Business Deposit Account and so (i assume) that i will get this income taxed when i do Company Accounts at the end of the Company Year.

Alan

Edit: Just re-read your OP, you are talking about personal bank account? If so then yes, as i understand it, you are correct. Unless somebody else knows different.

[LisaContractorUmbrella]

I believe I am right in saying the bank will take 20% and you will then, as a higher rate tax payer, be liable for the other 20% which you will need to declare on your self-assessment form.

[NotAllThere]

Switch to an offset mortgage. No tax on savings.

[Cheshire Cat]

Switch to an offset mortgage. No tax on savings.

Which brings me, neatly, on to my next point.
Presumably, as a higher rate tax payer, the net interest I would earn on my theoretical £10,000 is £240, or 2.4%

Assuming a mortgage interest rate of, say 6%, were I to put this £10k into an offset "pot" I would save myself £600 worth of interest in that year.

To "earn" that much interest NET of tax, in a separate account, I would need a gross APR of 10%. Not many cash savings accounts at that rate.

That's pretty much the USP of an offset, isn't it? That, as a higher rate taxee, I would need to earn a guaranteed interest of (1.66 x my mortgage) interest rate to make an offset unprofitable.

[Pegasus]

Please pardon my ignorance, but what is a "mortgage offset pot"?

Thanks.

[Gonzo]

So, assuming I have exactly 10k in the bank for a year, and the interest is 4% I'd earn £400 gross. I understand that banks will take basic rate tax at source, and for higher rate taxpayers, you must calculate the difference on your SA return, is that right?

In this case, I'd earn £312, as the bank would take 22% (£88) of the £400 interest, so presumably I'd need to pay a further £72 to HMRC to make up to the 40% (£160) tax.

Are these calcs correct?

Not quite correct, but you have the right idea. Banks pay interest net of 20% tax, this used to fully satisfy the basic rate tax which used to be 22% <SHAKES HEAD, MUTTERS ABOUT GORDON'S MEDDLING> but is now 20%. Higher rate tax payers will have to pay the rest with their self-assesment (although in future years your tax office will try and get it by making adjustments to your tax code, although these endeavours I feel are always doomed to failure).

So, in your example, £400 gross interest, £320 net interest, £80 on your tax return.

That's pretty much the USP of an offset, isn't it? That, as a higher rate taxee, I would need to earn a guaranteed interest of (1.66 x my mortgage) interest rate to make an offset unprofitable.

Yes.

[pmeswani]

Please pardon my ignorance, but what is a "mortgage offset pot"?

Thanks.

http://www.thisismoney.co.uk/help-an...&in_page_id=90

[Cheshire Cat]

thanks for the clarification, chaps.

[Fresh Air]

Yep lower rate (20%) taken by the bank at source, additional tax due when completing your SA form....

This always gives me a headache when trying to get the Section 352 Certs for a couple of my accounts!

As a previous post stated, offset mortgages are also good - no interest paid as the balance is offset against the mortgage, hence no tax.