Tax Liability

[Kos]

My wife and I have a joint savings account. Mr Taxman has written to me stating that because I earn more than �40k I have to pay higher rate income tax on savings.

Is this right if it is a joint account? Can my wife's lower allowance not cover it? Should we convert the account to her sole name?

[BigMac]

My (non-accountant) understanding is that the 'first named' on a joint account pays any tax due.

In my case, it's my name first and my partner's second, deliberately because my partner is a higher rate tax payer and I am not.

You can convert the account into her sole name for the future but you will still have the liability for this current and past tax years.

[dzug]

Yes that's right - you will have to pay higher rate tax on half the interest. Your wife's allowance covers the other half.

You can avoid this by converting it to an account in your wife's sole name. You have to trust her not to run off with it though - you have no control over what she does with it.

[kags]

If it is a joint account, you are each liable to tax on half of the interest but you can change it to a sole account to save on future tax. Big Mac, your plan doesn't work, unless there are some other circumstances you didn't mention. If your wife is named on the account you may have an undeclared tax liabilty.

[Miss Zippy]

As dzug says, you will only pay the extra tax (20%) on the interest that is attributable to your half of the savings. As already mentinoed, if your wife who is a basic rate taxpayer holds the accounts in her sole name, you will not be liable for additional tax infuture. Don't forget to make sure you both use your annual ISA allowances if you don't already, then neither of you will pay tax on interest.

[BigMac]

kags - our accountant doesn't recognise a joint liability. There is these days separate taxation and husband's/wife's earnings/interest do not have to be treated together. Despite this, my significant other insists on advising an accountant of the joint account - and the fact that I pay the tax on the interest - and each year they say there is no liability; I declare it as I am first named on the account.

If you recall from building society demutualisations, there was significant press coverage that only the first named on joint accounts qualified for any windfall. I believe the same is true of interest acrued on a joint account.

As said, I am not an accountant - but I pay my my accountant to advise me appropriately.

[kags]

BigMac The issue is not about separate taxation, it is about liabilty to taxation on joint income, which is entirely different. If it is a joint account then your wife is liable to tax on half the interest, the order of names on the account is irrelevant. There are circumstances where you can elect for the interest to be split differently, if the capital in the account was not conntributed evenly. If none of the capital in the account came from your wife, then perhaps this is what your accountant has done. I am not trying to berate you, simply don't want you to find yourself with an unexpected tax demand at some point!

[BigMac]

kags - I didn't take it as being berated; it's an honest exchange of differing views.

As you are so certain, I shall check again with my accountant. It may be that we have made a declaration or whatever that any interest should be treated as my income. I'm sure my husband will let me know.

[Kos]

Just to add to this debate I spoke to my Building Society about this today and they told me it makes no difference at all in what order the names appear on the account. The only way for the higher-rate tax payer to avoid paying the extra tax is for them to be removed from the account.

[kags]

whoops - assumed you were a man BigMac - sorry about the sex change!

[BigMac]

OK, have just had the reply from my accountant... I wrote: "...a joint account, both my wife and I have to declare and pay tax on the interest, the interest being split 50:50 and the tax on it paid at our respective tax rates. Is that the case?"

Answer: "That is true"

So, as I understand it, on gross interest of say �10.00 you each have a tax liability on �5.00. You will have to pay �2.00 (40%) and she will have to pay �1.10 (22%).

And apologies to kags - I am male, just find it amusing sometimes to challenge assumptions...

[dzug]

So, as I understand it, on gross interest of say �10.00 you each have a tax liability on �5.00. You will have to pay �2.00 (40%) and she will have to pay �1.10 (22%).

Not quite - on most if not all types of interest the basic rate is 20%, so she would only pay �1.00. In practice it's already been deducted at source so the only extra to pay is from the higher rate payer