The tax of togetherness
Paul Lewis on the tax implications of maintaining a joint savings account
Several readers have emailed to ask how tax is worked out on a joint savings account that is owned by a couple. Tax is due on savings account interest if either partner is a taxpayer and has used up their tax-free savings allowances. Banks and building societies tell HMRC the details of account-holders and the interest paid each tax year.
If there are two account-holders, it assumes the money is shared equally and assesses each partner for tax. If one is a taxpayer and the other is not, the taxpayer is assessed for tax on half the income and the other half is tax-free. The partner who has tax due on savings interest should find that the tax code on their earnings or company pension is adjusted to collect the tax due.
That’s the theory. But you should always check that the correct amount of tax is being collected, because HMRC sometimes gets its sums wrong – and also because the tax code is a good way to collect tax but not a good way to assess it.
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So my preference is to separate joint savings into two individual accounts. That makes the calculation easier and more likely to be accurate. To save tax, move money from the taxpayer’s account to the other’s account until their tax-free allowances are all used up. If the money in the account is not owned in equal shares, you can inform HMRC of the split, but that complexity means it is even more important to have an account each.
There is one word of warning about splitting a joint account into two. When one partner dies, all the money in a joint account becomes the property of the other immediately. That makes dealing with the expenses that inevitably follow much more straightforward than if there is an
account just in the name of the deceased person.
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It does not affect any Inheritance Tax due whether the account is joint or separated, as the deceased partner’s share of a joint account counts as part of their estate. But most people do not pay Inheritance Tax and if you are married or civil partnered and leave your savings to your spouse, no tax is ever due on it.
QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. Paul cannot answer you personally, but I will reflect them in his column