Reader Question – How can I avoid paying tax on my savings account interest?

2 min Read Published: 08 Aug 2012

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Reader Question:

Hi I am 61 and have just taken early retirement. My company pension is £813.00 per month and I also got a lump sum of £35,000. All my tax allowance is taken with my pension.

My question is would it be better to put the lump sum in my wife's name? She is age 61 and claims her state pension which is £6,916 per year which I believe does not use all her allowance would this help with are savings?

My response:

Currently the annual personal allowance is £8,105 (for those under 65) for the 2012/13 tax year. Based on your figures, and assuming both you and your wife receive the full income tax allowance, then only your wife has any unused tax allowance (approximately £1,189)

As you allude to, if a spouse is a non-income tax payer and their husband/wife is an income tax payer it can make sense to hold any money on deposit in a bank account in the non-income tax payer's sole name.

This is because bank interest is automatically paid net of 20% income tax (most people probably don’t notice this) The bank assumes that everyone is a basic rate or higher rate income tax payer so have used up their income tax-free personal allowance.

But, a non-income tax payer still has an unused personal allowance so they can inform the bank of this and receive interest tax-free (up to the value of their remaining personal allowance each year).They simply need to complete an R85 form, available from the HMRC website, and give it to the bank. (Bear in mind that if you place funds in an account in the sole name of a spouse then he/she would legally have sole control of the money - but if you're happily married....).

Alternative ways to receive interest tax-free

But there are other ways to save tax on your savings:

Cash ISAs

Any interest earned on money in a cash ISA is paid tax-free (even for tax payers such as yourself) but you can only save £5,640 per tax year into one. So you could place some of your lump sum into a cash ISA in your own name and receive interest tax-free.

National Savings & Investments (NS&I)

Also NS&I has a range of investments (including savings accounts, ISAs and premium bonds) with no UK Income Tax or Capital Gains Tax to pay on returns. However, do read my article 'Are premium bonds worth it? The good, the bad and the ugly side of the nation’s favourite investment'.

Best wishes

I hope that helps


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  1. well answered Damien
    It is probably worth mentioning that if you haven’t used your Cash ISA allowances yet then you should both put the £5,640 each (total £11,280) into a Cash ISA now, and then as soon as the new tax year arrives add another £5,640 each giving a total of £22,560 already held totally tax free

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