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Hello Sir,
can you please explain how the gross interest has been calculated ?c) Explain to Sam and Kim how their overall income tax liability could be reduced if they were to either:
(i) transfer their joint building society deposit account into individual savings accounts (ISAs)Joint income – Building society deposit account
The couple have savings of £25,000 in a building society deposit account which is in their joint names.
During the tax year 2007–08 Sam and Kim received building society interest totalling £1,200 from this joint account.
This was the actual cash amount received.
solution
Interest received from ISAs is exempt from income tax, so Sam will save tax at the rate of 40% whilst Kim will save tax
at the rate of 20% on gross interest of £338 (1,500 x 5640/25,000)
the limit foe cash isa is 5640 but i dont understand the way its calculatedkind regards..
The gross amount of BSI is 1500 on a deposit of 25,000. If both had transferred the max 5640 into an ISA from the building society account deposit then that would have exempted from tax for each of them 338 (based on the given proportionate calculation). This would have then saved tax at 40% for the higher rate taxpayer and 20% for the basic rate taxpayer.
They have saving of £25,000 in their BSI Account, received £1200 in interest.
To calculate the rate of return we ll have to gross up the £1200 figure first as its a actual amount received..
So £1200×100/80 =£1,500
£1500 / £25000 = 6% (return on their investment)
If they opt for ISA’s they can keep a maximum of £5,640 in cash.
Total tax savings therefore ll be £5,640 x 6% = £338 each
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