Tax advice please

Steve_xx

My uncle is 53. He doesn't work and he doesn't claim Jobseekers Allowance or any other benefits of any kind. His income is a small occupational pension that amounts to £5,300 per annum and no tax is deducted from it. He has savings and tops up his occupational pension with the interest it generates which amounts to £10,000 per annum roughly, after deduction of tax @ 20% on all of it. These are his only sources of income.

Should he not be entitled to have some of his savings income taxed at the 10% rate? For assessment purposes I'm talking about tax year April 2008 to April 2009.

Based on the above figures, how would one arrive at what he ought to be paying in tax?

PlutoinCapricorn

I believe that the 10% rate was abolished as from FY 2008/09, and the 22% rate reduced to 20%. The revised Personal Allowance was £6.035, to compensate for the loss of the 10%.

So if you take the PA off the total annual income, 20% of the remainder is the tax due. If you gross up the Interest (divide it by 4 then multiply the result by 5), you can see how much tax the bank has deducted. If there is a difference,you will need to notify HMRC of any overpayment.

jem16

Steve_xx wrote: »

Should he not be entitled to have some of his savings income taxed at the 10% rate? For assessment purposes I'm talking about tax year April 2008 to April 2009.

In your uncle's case he would be entitled to the 10% rate which is for savings only as his earned income is less than the personal allowance.

He needs to add up his gross income from his pension and his gross income from his savings (i.e. before tax). The deduct £6035 for his personal allowance and then £2320 for the 10% rate. Whatver is left will be taxed at 20% with the £2320 taxed at 10%.

Basically on £735 of his savings he should have paid no tax and on £2320 he should only have paid 10% and not 20%. I make that approximately £379 in overpaid tax. He will need to contact HMRC to organise a refund.

Any

http://www.hmrc.gov.uk/taxon/bank.htm#1

I think your uncle will have to complete self assessment return, where he states all his incomes and all taxes paid (the ones already deducted from interest earned) and the result will be tax rebate.

Have a look on the link I enclosed, that might give you more ideas.

fengirl_2

He should on no account self assess - once you get into the system you can never get out!
He needs to complete a form R40 to reclaim part of the tax paid on his interest and send it to the tax office whcih deals with his occupational pension.

Steve_xx

jem16 wrote: »

In your uncle's case he would be entitled to the 10% rate which is for savings only as his earned income is less than the personal allowance.

He needs to add up his gross income from his pension and his gross income from his savings (i.e. before tax). The deduct £6035 for his personal allowance and then £2320 for the 10% rate. Whatver is left will be taxed at 20% with the £2320 taxed at 10%.

Basically on £735 of his savings he should have paid no tax and on £2320 he should only have paid 10% and not 20%. I make that approximately £379 in overpaid tax. He will need to contact HMRC to organise a refund.

I thought like you, ie that he would be entitled to the Personal Allowance, and then the following first £2320 of his savings interest would be taxed at 10%. But on reading further I am coming to the conclusion that the 10% starting rate for savings wont be applicable to him because his pension earnings are in excess of the £2320 starting rate.

I note that the 10% starting rate was abolished for income from job/pension from 2008-2009 onwards and is only applicable to savings income. He will probably be looking at claiming for the 2007 - 2008 tax year too. For that year he will likely be able to get a refund I think because the 10% starting rate would apply to savings as well as job/pension income?

Here's a snapshot from HMRC site:
If the starting rate for savings (10 per cent) applies to you
The rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account. So if your non-savings income is less than the starting rate for savings limit (£2,440) - or if savings and investments are your only source of income - your savings income is taxable at the 10 per cent starting rate up to the limit.
However, your interest will have been taxed at 20 per cent so you will be able to claim part of the tax back.
Your interest will have been taxed at 20 per cent so you will be able to claim part of the tax back.

fengirl_2

Yes - this is why we have advised him to make a repayment claim.

trevormax

the 2320 limit applies to income above the personal allowance so as your uncles pension does not exceed the PA then yes he will get the 10 % for £2320 of his savings income. He does NOT need to become self assessed as he does not have more than £2000 of untaxed income. Do as Fengirl suggests and get him to complete an R40 each year to reclaim the overpaid tax. A rough estimate of the amount he is owed based on your figures.

Pension £5,300
Gross interest £12,500 (£10,000 plus £2,500 tax)
Total income £17,800
Less PA 6035 = £11,765

@ 10 savings rate 2320 = 232
@ 20 % Basic Rate 9,445 = 1,889

Total tax due = £2,121
Tax paid on interest £2,500
Overpaid £379

These figures aren't exact as the figures you have provided are not exact but you can see the picture.

Any

trevormax wrote: »

the 2320 limit applies to income above the personal allowance so as your uncles pension does not exceed the PA then yes he will get the 10 % for £2320 of his savings income. He does NOT need to become self assessed as he does not have more than £2000 of untaxed income. Do as Fengirl suggests and get him to complete an R40 each year to reclaim the overpaid tax. A rough estimate of the amount he is owed based on your figures.

Pension £5,300
Gross interest £12,500 (£10,000 plus £2,500 tax)
Total income £17,800
Less PA 6035 = £11,765

@ 10 savings rate 2320 = 232
@ 20 % Basic Rate 9,445 = 1,889

Total tax due = £2,121
Tax paid on interest £2,500
Overpaid £379

These figures aren't exact as the figures you have provided are not exact but you can see the picture.

Oh, I didn't know there is a limit. My FOL to self assesses, but that is the way it was always done and I hadn't realised that there is a threshold..
Every day you learn something new.. :T

Steve_xx

trevormax wrote: »

the 2320 limit applies to income above the personal allowance so as your uncles pension does not exceed the PA then yes he will get the 10 % for £2320 of his savings income. He does NOT need to become self assessed as he does not have more than £2000 of untaxed income. Do as Fengirl suggests and get him to complete an R40 each year to reclaim the overpaid tax. A rough estimate of the amount he is owed based on your figures.

Pension £5,300
Gross interest £12,500 (£10,000 plus £2,500 tax)
Total income £17,800
Less PA 6035 = £11,765

@ 10 savings rate 2320 = 232
@ 20 % Basic Rate 9,445 = 1,889

Total tax due = £2,121
Tax paid on interest £2,500
Overpaid £379

These figures aren't exact as the figures you have provided are not exact but you can see the picture.

Thanks for that. Yes I understand what you say and I kinda thought that was how it was until I read the section on the HMRC website, especially the highlighted bit on my post 6# . This seems to suggest to me that as his pension earnings are in excess of the £2320 10% starting rate, that he will not be entitled to reduce the tax already paid on his savings by 10%?

Hover, having said all of that I have just had a look elsewhere on the HMRC website and have found the following link:

http://www.hmrc.gov.uk/tdsi/example3.htm

If you look at the 2008-2009 table it seems to bear out what you said earlier, ie that a 10% rate is indeed applied to savings even though in the example the persons earned income is an amount in excess of the £2320 starting rate!

The link below seems to further reinforce what you said earlier:

http://www.hmrc.gov.uk/tdsi/example23.htm

But then this example seems to throw a spanner in the works:

http://www.hmrc.gov.uk/tdsi/example24.htm

Steve_xx

Any wrote: »

Oh, I didn't know there is a limit. My FOL to self assesses, but that is the way it was always done and I hadn't realised that there is a threshold..
Every day you learn something new.. :T

What did you mean when you said "a limit"?

Also, "FOL", what does it mean?