| Savers can slash hundreds of pounds from their tax bill by using a little-known loophole relating to the treatment of joint accounts.
The rules governing the payment of tax on joint deposits used to be fairly relaxed. Couples could decide which account holder paid the tax, in some cases allowing them to avoid deductions altogether.
In 2011 a new regime was introduced, which tightened up procedures, making the management of these accounts more arduous. But you can still boost your income by up to 40pc if you get to grips with the new rules and learn to exploit them to the full.
Here are our five top tips for cutting your tax bill while keeping your money safe and ensuring a top return.
Following the banking crisis, and with the Co-op in continuing turmoil, security of funds is paramount. Joint accounts are valuable, as a couple receive full compensation up to £170,000 from the Financial Services Compensation Scheme (FSCS) should their savings institution collapse, rather than the £85,000 protected in an account held in one name only.
There are many websites to help you track down the most attractive rates, such as SavingsChampion.co.uk and moneyfacts.co.uk. The Telegraph’s website, telegraph.co.uk/money, will keep you abreast of new launches. Sign up for our weekly newsletter at telegraph.co.uk/newsletter. See the report below for the best deals.
Tax can take a fair chunk out of what are often already derisory returns, particularly for higher-rate taxpayers. If one partner is a basic-rate or non-taxpayer, ensuring that nest eggs are taxed in their hands will reap rewards. This can be done either by depositing all funds in accounts in their name alone, by making an election in respect of joint accounts, or by maximising the use of Isas.
Mike Warburton of Grant Thornton, the accountancy firm, said: “The simplest and safest way to ensure any interest is taxed at the lower earner’s upper rate is to put the money into separate accounts in their name. Then there can be no argument with HMRC about what is going on.”
However, putting all your savings in one person’s name has significant drawbacks. Adam Waller, a tax expert at PricewaterhouseCoopers, said: “One partner is effectively giving away ownership and control, which some people may not be happy to do.”
There are complications if someone dies unexpectedly. With a joint account, the survivor continues to have access to the cash. In separate accounts, the money is frozen pending probate. Either way, the nest egg can be transferred free of inheritance tax to a spouse, should this be desired.
But perhaps the biggest problem with slicing a sizeable nest egg into £85,000 tranches is that there are so few institutions that reliably pay what might be considered a respectable return.
Danny Cox of Hargreaves Lansdown, the investment shop, said: “Managing lots of little accounts can turn into a real chore. You have to ask yourself whether the effort is really worth it.”
But SavingsChampion found that a couple with £750,000 on deposit could boost their return by nearly £800 by investing £170,000 slices into joint accounts, rather than in single lots of £85,000.
For example, you could earn £12,455 if you deposited £170,000 lots in Punjab National Bank’s two-year fix paying 2pc, Shawbrook’s 120 Day Notice account paying 1.85pc, Britannia Select Access Saver 4 paying 1.5pc, Yorkshire Building Society Triple Access Saver paying 1.4pc and the final £70,000 with Coventry’s PostSave Easy Access paying 1.4pc.
However, if you divided £750,000 into £85,000 slices to invest in one partner’s name alone, it would earn £11,662 spread between nine accounts.
Anna Bowes, a director of SavingsChampion, said: “If there are two of you, by using joint accounts you can get more money into the best accounts and sleep easy knowing it is protected by the FSCS.”
Elect to cut tax
Interest in joint accounts is taxed strictly on a 50/50 basis. This means that if a couple with £100,000 earn 1.5pc, or £1,500 annually, HMRC automatically assumes that each person has earned £750. Interest is normally paid after the deduction of 20pc tax, with higher-rate taxpayers settling their further 20pc liability via a tax return.
A non-taxpayer can fill in a form R85 to receive interest without tax deductions. Not all savings institutions can cope with splitting tax treatment on joint accounts, although Nationwide and Yorkshire are two building societies that can.
In our example, the non-taxpayer will receive £750. The higher-rate taxpayer suffers 20pc tax at source, leaving £600, and the loss of a further £150 via his or her tax return. Jointly, their account will earn £1,200 return, with the taxman taking £300.
But their tax bill could be virtually wiped out if they exploited the regime introduced in 2011 and submitted a Form 17, which allows them to elect who pays the tax based on a reallocation of “beneficial ownership”.
Account holders could, for example, notify HMRC that the money was 99pc owned by the non-taxpayer and only 1pc by the higher earner. Interest would be taxed accordingly, allowing £1,485 to escape tax altogether, with just £15 subject to higher-rate tax.
In this way, the couple would get to keep £1,494, boosting their income by £294 and cutting the tax bill to £6. When hundreds of thousands of pounds are at stake, the savings are substantial.
However, HMRC requires hard evidence to accompany the Form 17, substantiating that the declaration of beneficial ownership is legitimate. This could be a statement from the higher-rate taxpayer confirming that he or she has given the money to a spouse.
John Whiting, director of the Office of Tax Simplification, said: “It can be done, but it is not as easy as people sometimes presume. They must follow the rules carefully.”
If successful, the joint account will allow a couple to continue enjoying FSCS protection of up to £170,000 in the best accounts.
A spokesman for the FSCS said: “When it comes to allocating compensation, we look at the name or names on the account and the amount of cash held within it. We are not interested in any tax matters.”
Savings institutions are more likely to struggle with discretionary interest splits, so it may be better to claim tax back via tax returns. However, Yorkshire Building Society said it would help where possible.
Make the most of Isa allowances
Savers will also need to keep their wits about them to avoid falling foul of the new Isa rules.
Currently, anyone can invest £11,880 in Isas, of which £5,940 can be held as cash on deposit. However, from July 1, new Isas (Nisas) will allow investors to save up to £15,000 within an Isa wrapper. In just 10 weeks, savers will be able to top up their cash Isas by another £9,060.
However, you can have only one cash and one stocks and shares Isa each tax year. Particular care will be required if you opt for a fixed-rate cash Isa today, as you may not be able to top it up come July.
This could prevent you from exploiting the Nisa opportunity, as you may not be able to put more in and may then lose interest by transferring the money elsewhere. Halifax currently offers the pick of the fixed-rate Isas, pegging the rate at 2pc for 18 months.
WHERE ARE THE BEST DEALS
By Telegraph reporters
Savers still face a struggle to keep their money growing at the same pace as the cost of living, and therefore protect its “real” value, despite falling inflation.
Figures issued last week by the Office for National Statistics indicated that inflation had fallen from 2.8pc a year ago to 1.6pc today.
As a result, the “real” return savers can earn from a £20,000 deposit is £168 higher than a year ago, according to analysis for The Sunday Telegraph by MoneyComms, a research company.
However, the vast majority of savers will still be losing value to the destructive power of inflation.
To maintain the value of your funds, basic-rate taxpayers need to earn 2pc. Just 71 of 612 accounts beat this rate, according to Moneyfacts. Most involve tying your money up for five years. A higher-rate taxpayer needs 2.66pc to retain real value.
The top account today is a seven-year fixed-rate deal from FirstSave paying 3.5pc, but this involves locking funds away over a period when interest will be rising and better terms may become available.
For those who want access to their cash in the meantime, only Britannia, part of the Co-op, pays as much as 1.5pc on easy access. The account allows just four free withdrawals a year. Further access reduces the rate to 0.1pc (or 0.08pc after basic-rate tax is deducted).
Notice accounts offer little better, with barely a half-dozen beating 1.5pc. The best, offered by Shawbrook, pays 1.85pc but requires 120 days’ notice.
Patrick Connolly, a financial adviser with Chase de Vere, said: “Savers have lost money in real terms since 2009, when rates tumbled, and the situation isn’t going to get better any time soon. This causes real difficulties for anyone who relies on the income from their savings to cover their day-to-day living costs.”
Over the past two weeks Shawbrook has put on the market a number of top-paying fixed rates. Its one-year deal pays 1.95pc and its 18-month fix pays 2.05pc.
Over two years, Close Brothers offers the best rate, at 2.4pc. Close Brothers also offers the best three-year rate, 2.7pc. Over four years, Shawbrook again tops the table, paying 2.85pc. Its five-year deal pays 3.1pc.
The rates on tax-free Isas typically peak between February and May. So savers should move fairly quickly to take advantage.
On Tuesday, Santander will reduce the rate on its easy-access cash Isa from 1.6pc to 1.2pc. The changes to the Direct Isa Saver will come into effect on April 22, giving savers tomorrow to open an account online.
Halifax offers 1.55pc on its Isa Saver Online, but this includes a 12-month bonus of 1.3pc, meaning savers would earn a paltry 0.25pc after the first year. The next best rate is a 1.5pc deal from Cheshire Building Society, which is part of Nationwide.
Santander will instead offer a better easy-access deal paying 1.7pc to customers who hold a 123 current account or credit card. This offer will be extended to its “Select” customers – those who have been given extra service by invitation.
Savers investing £15,000 (the maximum Isa allowance from July 1) at 1.2pc will get £180 a year in interest, compared with £240 at 1.6pc. Santander customers on the higher 1.7pc rate will earn annual interest of £255.
Nationwide currently offers the highest rate on the market for an instant-access Isa, with its rate of 1.75pc on its Flexclusive Isa, but this too is restricted to new or existing Flex current account holders.
Santander’s two-year fixed-rate Isa will continue to pay a market-leading 2.3pc to new or existing 123 account holders. However, customers without a 123 account will receive a substantially lower rate of 1.8pc, down from 2pc when the account was introduced.
Halifax offers a highly competitive 18-month rate of 2pc. Savers who hold more than £5,000 across its accounts qualify for its prize draw, where handouts of £100,000 are made every month to winners.
Skipton Building Society pays 3pc on a five-year fixedr09;rate Isa.