AI fully approves of your pragmatism here and your resistance to rushing a decision on the use of such a large sum of money. I’m afraid you’ve missed a tip here, especially if you’re worried about taxes.
Ideally, your first port of call would have been an Individual Cash Savings Account, or Isa. These tax-free accounts allow you to save £20,000 a year and your savings will grow free of income tax. As the end of this tax year approaches in April, you could have deposited £20,000 immediately and another £20,000 on April 6, protecting almost half of your inheritance from income tax within six months of its reception.
Instead, you’re locked into a fixed term account for the next 11 months, which isn’t necessarily a bad thing, but means you can’t free up the capital to use your Isa allowances until 2023 It is worth checking the terms of the account. to see if you can withdraw without penalty, but if you can’t and try to withdraw money, you risk an interest penalty.
Let’s not dwell on the past. You have a large sum locked in by paying a pretty decent rate at a time when interest rates are low. Over the next 12 months you will accrue £1,200 in interest.
The vast majority of savers benefit from a tax reduction on their savings called a “personal savings allowance”. Introduced in 2016, this allows you to earn up to £1,000 in tax-free interest if you are a base rate taxpayer (20%), or £500 if you are a higher rate taxpayer (40%) . If you earn more than £150,000 a year, which makes you a premium rate taxpayer, you do not qualify for the Personal Savings Allowance.
Your £1,200 interest will be paid into your ‘gross’ account, meaning no tax will be deducted. But, depending on the income you earn, £200 or £700 of that interest will be subject to tax.
If you are a basic rate taxpayer, meaning you earn less than £50,270 in the current tax year, you will pay 20% on £200 interest, a total tax bill of £40. If you’re a higher rate taxpayer, meaning you earn between £50,270 and £150,000, you’ll pay 40% on £700, leaving you with a tax bill of £280.
Although income tax rates differ in Scotland, UK rates and thresholds are used for savings interest.
The tax will likely be collected through the Pay As You Earn system, as your savings provider will provide information about your interest to HM Revenue and Customs. You will receive a coding notice to confirm this. Alternatively, you can report the interest on a self-assessment tax return. You won’t need to report it until you receive the interest in January 2023, so on your 2022/23 tax return. The deadline to submit it and pay any taxes due will be January 31, 2024.