For the past 12 years, interest rates on cash have been historically low (I believe the technical term is naff all). And as one client once put it: “the tax on naff all, is naff all.”
So, what has changed? For the first time in over a decade, the rate of interest on cash is actually giving a return. The average interest rate on instant savings is now in the region of 3% (Source: The Times).
Whilst this has made cash somewhat interesting, it also means that for the first time in a long time, clients need to be conscious of the potential for tax on their cash reserves.
Let’s take the example of Mr and Mrs Smith. Mrs Smith is a higher rate taxpayer due to her final salary and state pension whilst Mr Smith is a basic rate taxpayer only receiving a state pension.
As part of their financial plan, they keep £50,000 as an emergency cash reserve – the equivalent of one year’s income. They also plan to spend £25,000 on the house over the next 18 months. As such, they have cash reserves of £75,000.
Over the past 12 years, they were able to get approximately 1% from their joint account. This meant taxable interest of £750 or £375 each. This £375 sat comfortably within their Personal Savings Allowance of £1,000 for Mr Smith (basic rate taxpayer) and £500 for Mrs Smith (higher rate taxpayer).
However, going into the next tax year, they can get 3% on their cash – £2,250.
If they leave their cash in joint names, as shown in table 1 this will give rise to the following tax liability:
Table 1
| Mrs Smith (£) | Mr Smith (£) | Total (£) | |
|---|---|---|---|
| Share of cash | 37,500 | 37,500 | 75,000 |
| Interest | 1,125 | 1,125 | 2,250 |
| Personal savings allowance | 500 | 1,000 | 1,500 |
| Tax at marginal rate | 250 (625 @ 40%) | 25 (125 @ 20%) | 275 |
By not taking any action, Mr and Mrs Smith will be taxed approximately 12% on their cash interest. However, what if they split the cash differently as demonstrated in table two?
Table two
| Mrs Smith (£) | Mr Smith (£) | Total (£) | |
|---|---|---|---|
| Share of cash | 16,500 | 58,500 | 75,000 |
| Interest | 495 | 1,755 | 2,250 |
| Personal savings allowance | 500 | 1,000 | 1,500 |
| Tax at marginal rate | 0 | 151 (755 @ 20%) | 151 |
The amount of tax saving in the above example probably falls into the “every little helps” category. However, if you were holding larger cash reserves for say, a property purchase, a capital gains tax bill or planned gifts to family (or perhaps just for the comfort of cash), don’t get caught out by tax just as it starts to become a little bit interesting.
This blog is intended as an informative piece and does not construe advice. If you have any further questions, please don’t hesitate to contact us.
If you’re a client you can reach us on 0161 486 2250 or by getting in touch with your usual Equilibrium contact. For all new enquiries please call 0161 383 3335.
Sources
The Times – Best Savings Accounts in 2023 – https://www.thetimes.co.uk/money-mentor/article/best-savings-accounts/#easy-access
