40% tax on earnings...affect on savings

Andystriker

Aegis wrote: »

Yes. Your savings are taxed at your highest marginal rate, so you will need to pay an additional 25% of your interest to the taxman each year. Your savings interest can actually make you a higher rate taxpayer for some of your interest if you are slightly below the higher rate threshold.

Sorry if that's not great news!

Why an additional 25%?

If he has already paid 20% tax at the bank/bs and he pays 40% tax then does he not owe an extra 20% tax on his savings taking his payment up to the 40% rate?

Or have I got it wrong.

Andy

jem16

Andystriker wrote: »

Why an additional 25%?

If he has already paid 20% tax at the bank/bs and he pays 40% tax then does he not owe and extra 20% tax on his savings taking his payment up to the 40% rate?

Or have I got it wrong.

Andy

Depends if you look at net interest or gross interest.

For example £100 gross interest at 20% = £20.
£80 net interest at 25% = £20

So technically Aegis is correct in saying you have to pay an extra 25% of your interest ( i.e. net interest).

WaxiesDargle

dreemgirl wrote: »

what is the amount of the 40% threshold?

£37,400 (after taking off your allowance)

so in effect you can earn 37,400 + 6,475 = £43,875....before the 40% comes in



( I think I have that right...I'm sure someone will let me know otherwise )

Andystriker

jem16 wrote: »

Depends if you look at net interest or gross interest.

For example £100 gross interest at 20% = £20.
£80 net interest at 25% = £20

So technically Aegis is correct in saying you have to pay an extra 25% of your interest ( i.e. net interest).

Ah,

See what you mean.

I thought he meant 45% in total when he said an additional 25%.

Aegis

Andystriker wrote: »

Ah,

See what you mean.

I thought he meant 45% in total when he said an additional 25%.

Nah, jem explained it very well

WaxiesDargle

So let me get this right (it takes a while with me!)
let's say that I go one pound over the threshhold and I have to pay 40% tax on that pound..

..and I have £10,000 savings not in an ISA (that would be nice)

I have to pay 40% on all that 10 grands interest?

Aegis

WaxiesDargle wrote: »

So let me get this right (it takes a while with me!)
let's say that I go one pound over the threshhold and I have to pay 40% tax on that pound..

..and I have £10,000 savings not in an ISA (that would be nice)

I have to pay 40% on all that 10 grands interest?

Yes, if you're £1 over the income tax threshold based on your salary, then everything you earn on savings interest outside an ISA is taxed at 40%.

On the other hand if you earn £1 less than the higher rate, the first £1 of savings interest will be taxed at 20% and the rest at 40%.

jem16

WaxiesDargle wrote: »

So let me get this right (it takes a while with me!)
let's say that I go one pound over the threshhold and I have to pay 40% tax on that pound..

..and I have £10,000 savings not in an ISA (that would be nice)

I have to pay 40% on all that 10 grands interest?

Yes you would.

However in that situation you would already be paying 40% tax on £9,999 of that savings income.

Remember your gross savings income counts towards your total income which is all taxed. It's not a case of earned income only counting.

Trying_to_be_good

Yep. It's all income and all taxed - the interest is just "unearned" income, as oppose to salary that's "earned" income. I think the interest would take you into the 40% tax rate anyway (and should be declared on a tax return), so it's not the payrise that does it on its own.

jamesd

If you're just in the 40% band then you're in a good position to make pension contributions and get higher rate tax relief on the 40% money.