Money Talks

The couple’s tax trick that could save you £8,500 a year

Couples can save thousands of pounds in tax by using a little- used trick beloved of advisers – switching their savings from one to the other.

The Daily Telegraph’s new “switch your savings” calculator works out the optimum amount of money held in savings accounts to switch from the higher- earning partner to the lower earner. By doing so, one partner can end up paying no tax at all on their savings interest, while the higher earner can drastically cut their tax bill. The switching trick is more important now because steeply rising interest rates means more people than ever are paying tax on their savings.

Anyone with modest savings may find the interest is enough to generate a tax bill. At 5pc interest rates, a higher- rate taxpayer would only need £ 10,000 in savings to fall into the tax net.

What most people don’t realise is that people on a low income can benefit from three exemptions from savings interest and, by exploiting those, a couple can save vast amounts of tax.

STARTER RATE FOR SAVINGS Where one partner has an income below £ 17,570 they can use a little-known exemption for savings interest which can give relief from tax for up to £5,000 of interest. This tax free band – called the Starter Rate for Savings – is worked out by subtracting taxable non-savings income from £17,570. If the difference is more than £5,000 then the tax-free band is £5,000. If it is less than £5,000 then that is the amount of the tax-free band. In this band tax on savings is 0pc.

NON TAXPAYERS

If one partner has an income below the personal tax allowance of £12,570 the difference between this and their income can be added to tax-free savings allowances.

THE SAVINGS ALLOWANCE

All basic rate, 20pc, taxpayers get a £ 1,000 savings tax allowance which exempts that much interest from attracting income tax. The allowance for higher-rate, 40pc, taxpayers is £500 but it is zero for people who pay the top rate, 45pc, of tax which is charged on income above £ 125,140 a year. By exploiting these allowances – which can be used together – a couple with unequal incomes and large amounts of savings can avoid tax on the interest paid on more than £100,000.

How to do it Example 1: two low earners

For example, Winifred, 75, has her state pension of £161 a week plus a pension from her job of £219 a month making an annual income of £11,000. She has £8,000 of savings which earns 5pc in a savings account. She pays no income tax.

Her husband Thomas has a state pension of £200 a week and pensions from his old employers total £2,883 a month making a total income of £45,000 a year.

He has £100,000 savings which also earns 5pc giving him £5,000 a year savings interest. He gets the £1,000 personal savings allowance so he is taxed on £4,000 interest at the basic rate which is £800.

If Thomas gives £80,000 of his savings to Winifred his remaining £20,000 at 5pc earns him just £1,000 which is covered by his £1,000 personal savings allowance so he pays no tax, saving him £800 a year.

Winifred has three tax allowances against her savings.

So when Thomas gives her £80,000 of savings on top of her own £8,000 that will earn £4,400 in interest, well short of her allowances. Neither pays tax on the interest from a total of £108,000 savings.

How to do it Example 2: two middle earners

Anna and Steve can save even more tax. Steve has an income of £60,000 a year. He earns £5,000 at 5pc from his savings of £ 100,000 and after the £500 personal savings allowance he pays £1,800 in tax.

Anna has a part- time job earning £15,000 a year and also has £8,000 in savings. She has no personal allowance left over but she does have a starter savings rate of £2,570 (£17,570 minus her £15,000 salary).

On top of that is her £ 1,000 personal savings allowance. So she can earn a total of £3,570 in interest without paying any tax and at 5pc interest she could have £71,400 savings before tax was due.

Steve transfers £63,400 of his savings to Anna. That leaves him with £36,600 which earns £1,830 in interest. The tax on that after his £500 personal savings allowance is just £532. Anna now has £ 71,400 in savings which at 5pc interest brings her £ 3,570. That is covered by her two allowances meaning she pays no tax on it. So Steve has saved £1,268.