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My girlfriend and I may both use up our ISA allowances this year. We are currently saving for a deposit on a house, so we are considering opening a joint bank account. Next year, I will probably be paying higher rate tax, but she won't.

How is income tax on a joint bank account attributed? Can we attribute it all to her to pay less tax?

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Interest on a joint account in the UK is attributed to both account holders with an equal 50/50 split, regardless of who has deposited the account balance.

If next year you become a higher rate tax payer but your girlfriend remains on the basic rate, you would have to pay the full 40% rate of tax on half of the interest.

E.g. You have a balance of 100 pounds on which you receive 5 pounds in interest. 2.50 is attributable to you and 2.50 to your girlfriend. The bank will deduct 1 pound in interest automatically (20%), 50p tax each. Your girlfriend has already paid all tax due. Your 2.50 is taxable at 40% so you owe the taxman another 50p which you will have to declare in your tax return.

Another way to think of it is that for a joint account where only one account holder is a higher rate payer you will owe 30% tax instead of the full 40%.

If you're happy for the account to be held only in your girlfriend's name then she will be taxed at 20% on the whole balance.

c.f. worked example from HMRC

  • That's a very clear explanation, but I'd love to know where you've found an account that will pay 5% on £100 balance :-) – Vicky Jan 14 '13 at 11:41
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    @Vicky the example is from the lesser known Bank of Easy Mathematical Calculations, although I'm afraid they're not accepting new account applications due to lacking a sound basis in financial reality – thepassiveinvestor Jan 14 '13 at 15:13

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