HMRC has confirmed a "tax-free gift" rule for couples with separate personal savings accounts, clarifying how interest is taxed when money is moved between them. The Labour Party government's tax arm explained the rules that apply and how couples can potentially move money around tax free.
A taxpayer asked HMRC via X, formerly Twitter: "For a married couple, one earner and one non-earner, if we move money between our personal savings accounts (not a joint account), how do we work out whose income the interest is for tax?"
HMRC responded: "When you move money between individual bank accounts, the person who legally owns the account is responsible for the tax on the interest earned." This means that even if one spouse earns the money, the interest is taxed in the name of the account holder.
How savings interest is taxed
Most people can earn some interest from their savings without paying tax. Your allowances for earning interest before you have to pay tax on it include your Personal Allowance, starting rate for savings, and Personal Savings Allowance. These allowances apply each tax year (6 April to 5 April), and how much you get depends on your other income.
You can use your Personal Allowance to earn tax-free interest if you have not used it up on your wages, pension, or other income. You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings. However, the more you earn from other income (for example, wages or pension), the less your starting rate for savings will be.
Eligibility and examples
You are not eligible for the starting rate for savings if your other income is £17,570 or more. Your starting rate for savings is a maximum of £5,000, and every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
HMRC provides an example: "You earn £16,000 of wages and get £200 interest on your savings. Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages. The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430. Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest."
Practical implications for couples
For couples with one earner and one non-earner, moving money between accounts can help utilise the non-earner's Personal Allowance and starting rate for savings, potentially reducing the overall tax bill. However, the account holder is responsible for tax on the interest, so couples should consider who owns the account to optimise their tax position.
HMRC's clarification provides a clear rule: the legal owner of the account is taxed on the interest. Couples can use this to plan their savings strategy, ensuring they make the most of available allowances.
