Savers expecting to fall into the 40 per cent income tax bracket when the threshold is reduced in April should change the date on which they receive interest on their bank and building society accounts to avoid paying more tax, say experts.
From April 6, the 40 per cent income tax threshold will be reduced from £37,401 to include anyone with taxable income above £35,001.
The Institute of Fiscal Studies estimates that an additional 750,000 people will pay the higher rate of tax in the 2011/2012 tax year.
However, Defaqto, a fin-ancial analyst, says individuals on the cusp of becoming higher-rate taxpayers can act now to ensure their savings accounts pay them interest before the end of the tax year so that this income will only be taxed at basic rate.
“Savings accounts generally pay interest net with tax deducted at the rate of 20 per cent. However, higher-rate taxpayers have a further tax liability on the interest received,” says David Black, Defaqto’s analyst for banking.
“For those people who are likely to be in a different tax bracket in the next financial year, it could make a considerable difference whether they receive interest from their savings accounts this side of April or after the new tax year begins.”
He gives an example of someone aged under 65 on a salary of £42,475 and annual interest of £1,400 net of basic-rate tax from a building society savings account. When that person enters the higher-rate tax bracket, their income tax liability for 2011/2012 would be higher and they would have to pay £350 more in tax.
For those moving into the 40 per cent tax bracket, and therefore wanting to realise more income in the current tax year, advisers suggest closing an existing variable interest savings account and taking the interest before the new tax year. This would only be worth doing if there were low penalties for doing so.
In addition to the income tax threshold changes, there are circumstances that might also cause an individual’s income to vary substantially between one tax year and another.
These include being made redundant, changing from full-time to part-time work, having a baby or retiring.