My wife is a low earner – she gets about £14,000 a year from her part-time job.  However, we do have quite a bit of savings in deposit accounts which give us interest each year of about £3,000.  At the moment half of that is in my name and half in hers – I am a higher rate taxpayer.  I’ve been told by a friend that I should put more of the savings in her name as she should pay no tax on her interest at all because she doesn’t earn very much.  Is this true?

Carl Lamb of Smith & Pinching Responds

There are two tax-saving measures that can be used in tandem here:  the personal savings allowance and the starting rate for savings.

The personal savings allowance gives tax-free interest on savings accounts up to the allowance figure that applies to your tax band.  As a higher rate taxpayer, you have a personal savings allowance of £500 per year whereas your wife, as a basic rate taxpayer, gets £1,000 per year.  Additional rate taxpayers don’t get this allowance.

The starting rate for savings is only available to those whose other income (ie excluding savings interest) is no more than £17,500 a year.  It gives up to £5,000 in savings interest free of tax, on top of the personal savings allowance, depending on your income.  The rules are a little complex:  for every £1 you earn over the personal allowance for income tax (so normally £12,500 in 2020/21), your starting rate for savings is reduced by £1.  In the case of your wife’s earned income of £14,000, she has £1,500 income over her personal allowance, so her starting rate for savings would be £1,500 less than the £5,000 maximum – so £3,500.  Her personal savings allowance can be added to this, giving her a total tax-free savings interest allowance of £4,500.

Clearly this scenario would give you scope to reduce the overall tax liabilities on your savings accounts by moving savings from your accounts to hers.  However, it must be a genuine gift:  if you retain access to the account and its interest, HMRC may still consider you as a beneficial owner and tax you on at least a share of any interest.

These figures are just a guide:  there may be other factors to take into account such as any other investment income (dividends etc) or other income that your wife may receive.

My final point is that it might be a good idea to review your savings and investments to ensure that they are delivering what you want to achieve.  With interest rates still very low, savings accounts do struggle to keep pace with inflation and may be losing value in real terms.  I suggest you get independent financial advice to consider what other options may be suitable for you and your wife.

References to taxation are based on our understanding of current legislation and HMRC practice, both of which may change.  Tax treatment depends on individual circumstances and may change if circumstances change.  Any opinions expressed do not constitute advice.  The value of your investment can go down as well as up and you may get back less than the amount invested.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.