Low annuity & Tax free interest on savings, how to calc tax?

Mikeyorks

ajw1100 wrote: »

I did not realise there was a 10% income tax, sound good to me. .

Firstly - apologies for my inability to subtract £5925 from £7475. It is of course £1550 and not the £550 I have quoted twice! Sorry.

The 10% applies solely to savings interest - where your interest exceeds your personal allowance ..... by up to £2560. There's a worked example here (but it's old .... so you need to substitute £7475 for the personal allowance and £2560 for the 10% rate)

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

If you're struggling - post your income for 2011-12 here. But, as CLAPTON rightly points out, you need to include any JSA paid in the first few months of the year. And an indication of how much tax your annuity provider is deducting monthly would help (in particular for someone who is suddenly struggling with 'take aways'!)

xylophone

See http://www.hmrc.gov.uk/tdsi/ten-per-cent-guidance.htm This uses tax bands for 08-09 in the examples so substitute correct figures using http://www.hmrc.gov.uk/rates/it.htm

ajw1100

Thanks for the links, I have printed them out and will digest a bit later.

I contacted my Annuity provider and the figures are
Gross annuity £520.75 less tax of £5.20 = £515.55 PCM.
(My previous IFA lost me £100k of which the FSCS compensated £48k but I could not use this to add to my annuity which should have been about double what I am receiving.)

I assume the annuity is treated as 'earned income', if so then the gross figure of £520.75 x 12 = £6249.00, my allowance for 2011~12 being £7475.00 leaves a 'credit' of £1226.00.
Here's my guess work, I could earn £1226. of tax free interest but anything above that is taxed. The Guidance link above implies some of my savings income may be taxed at 10%. It also states that with a mixture of income & savings income, then any savings income above £2320 will be taxed at 20%.
I am not sure if I am reading this correctly or just making my own, incorrect, interpretations!

Mikeyorks

ajw1100 wrote: »

It also states that with a mixture of income & savings income, then any savings income above £2320 will be taxed at 20%.

You're correct - with the exception of the above. Any Savings income which exceeds your personal allowance by up to £2560 (the 10% rate is indexed and the £2320 applies to an earlier year) will be taxed at 10%. Anything above that (ie £7475 + £2560 = £10035) will be at 20%.

If we assume that you have the annuity for a full year. And using your gross interest figures from post #1. And assuming tax is deducted from the interest at source .... as the R85s shouldn't really be in place :-

Annual earned income (annuity) .............. 6249
Personal allowance (2011-12) ................. 7475
Unused allowance ................................. 1226

Interest from PO account (gross) ............ 1400 (tax deducted £280)
Interest from 'Bond' (gross) .................... 1250 (tax deducted £250)
Total interest ....................................... 2650
Less unused allowance .......................... 1226
Interest chargeable .............................. 1424

As this is less than £2560 then 1424 X 10% = £142.40 tax due
Tax paid ................................................ = £530.00

Tax overpaid and refundable .................... = £387.60

If you cancel the R85s at April 2012 and get HMRC to restore your Code number to the full basic. Then there will be no tax due on the monthly annuity ...... and the arithmetic will look like the above (subject to updating the personal allowance and 10% rate band value. As both these are (normally) indexed.)

ajw1100

Hi Mike.

Thanks for the reply, a few points I need clarification on if I may.

Mikeyorks wrote:

Interest from PO account (gross) ............ 1400 (tax deducted £280)
Interest from 'Bond' (gross) .................... 1250 (tax deducted £250)

Where did the tax deducted figures come from, or how did you arrive at them?

My annuity only started in May this year (2011) so this will have no bearing on the savings income for 2010~2011, as long as the interest received does not exceed my personal allowance for that period (£6475, I wish!) then no income tax will be owed to the HMRC?

I think I need to find out exactly the amount of tax free interest I have received during the year 6 April 2010 ~ 5 April 2011.

Then all my income, both annuity and interest from 6 April 2011 to date.
(As Clapton kindly suggested) Once I have these I can get an idea of what I will receive in interest and annuities for the rest of the tax year. I will then post the figures here, this will not be for a few days as I want to make sure I have everything. I will probably post after the weekend.

Thanks for your help.

Mikeyorks

You need to carefully read my 'assumptions' prior to the working out? It was intended to show you how you can calculate it in a 'clean' year .... hence the notes to tell you to uprate the personal allowance etc for the year being calculated. But - if you can provide 'actuals' for this year - then someone will do the arithmetic.

Where did the tax deducted figures come from, or how did you arrive at them?

Those are the gross figures you provided at the start. If you remove the R85s then that is the tax (at 20%) that would be deducted at source by whoever holds your savings.

eg PO account £1400 x 20% = £280

Incidentally - the figure witheld from your coding for interest (£1550) is very different from the £2650 ('plus a few other accounts') you've mentioned in your original post. Are you sure it is 'interest' the Bond pays out?

ajw1100

Please find below my income & tax for 2010~2011. The MGM was a 25 year policy I paid by DD and had forgotten when it matured, I did send a copy of the final statement I received from MGM showing the tax to HMRC when they asked for details of my income, however at that time I had not received all the tax certificates for my savings accounts. What also confuses things is that I ditch and switch as soon as introductory rates drop.

Income for 2010~2011
.............................................Gross ....Tax Pd... Equalisation... Net
Halifax Reward.£5. pcm .............60.00
P.O Savings accnt ................. 334.91 .....19.83 ........................315.08
Santander Trakr Bond ...............56.09 .......0.00 .........................56.09
Skandia CIA ...........................666.47 ...133.32 ......46.46 ..........581.61
***MGM Advantage 25yr policy 7839.00 .1567.00 ......................6272.00 See note *** below.
NS&I ....................................790.00 ....158.00 ...................... 632.00
ING Direct ............................1037.53 ......0.00 ......................1037.53
1st Annuity Payment 01/04 ........89.00 .....17.80......................... 71.20
....................TOTALS.........10,873.00 ..1895.95 .....46.46 ....... 8965.51

Allowance...................... 6475.00
Income over allowance..... 4398.00
20% Tax on 4398.00...........879.60
Tax Paid as Above........... 1895.95
Less the 20% on 4398.00.. -879.60

Overpaid tax?................. 1016.35.

*** MGM advantage. The gain was as above £7839 as shown on my letter from MGM which states.
[The following needs to be entered in sections 12.3, 12.4 & 12.5 of your self assessment tax form:

Number of years 25
Tax treated as paid £1567
Amount of gain £7839.]

The amount I received as a transfer from MGM to my current account was £16,979.43, being my payments to them over 25 years and the gain from those payments.
Now if I give HSBC £50k from my current account and they give me £1k interest a year later then I transfer the whole back into my current account then my 'income' is still the interest of £1k?


I do not want to owe HMRC and would like to get things straight with them as soon as possible.

I will worry about this years situation later:(

Thanks for your help and patience.

antonic

I used to work in the HMRC Compliance Unit for the R85 scheme and can tell you that if at any point during the tax year 06/04/xx to 05/04/yy your income exceeds your tax allowance (currently £7475) then all R85`s MUST be cancelled and tax deducted from the interest.

At the end of each tax year ALL financial institutions make a return to HMRC of ALL accounts registered for Gross Interest (R85 Scheme) and they are then compared to all information held by HMRC.

If you are liable to tax AND have incorrectly registered for Gross Interest you MAY be penalised (Its been awhile since I worked there).

Also you need to factor into your calculations that you are entitled to a 10% tax rate on £2560 of your savings income.

Hope this helps

ajw1100 wrote: »

Please find below my income & tax for 2010~2011. The MGM was a 25 year policy I paid by DD and had forgotten when it matured, I did send a copy of the final statement I received from MGM showing the tax to HMRC when they asked for details of my income, however at that time I had not received all the tax certificates for my savings accounts. What also confuses things is that I ditch and switch as soon as introductory rates drop.

Income for 2010~2011
.............................................Gross ..Tax Pd Equalisation Net
Halifax Reward.£5. pcm .............60.00
P.O Savings accnt ................. 334.91 ..19.83 .................315.08
Santander Trakr Bond ...............56.09 ..0.00 ....................56.09
Skandia CIA ...........................666.47 .133.32 ....46.46 ....581.61
MGM Advantage 25yr policy ....7839.00 ..1567.00 .............6272.00
NS&I ....................................790.00 ..158.00 ............... 632.00
ING Direct ............................1037.53 ..0.00 ..................1037.53
1st Annuity Payment 01/04 ........89.00 .17.80.................... 71.20
....................TOTALS.........10,873.00 ..1895.95 ..46.46 .. 8965.51

Allowance...................... 6475.00
Income over allowance..... 4398.00
20% Tax on 4398.00...........879.60
Tax Paid as Above........... 1895.95
Less the 20% on 4398.00.. -879.60

Overpaid tax?................. 1016.35.

I do not want to owe HMRC and would like to get things straight with them as soon as possible.

I will worry about this years situation later:(

Thanks for your help and patience.

ajw1100

Words of wisdom that I will act upon.

I had edited my post as you were replying to it, my apologies!

I think I had better write to HMRC and send copies of all my tax statements for the year 2010~2011 and let them advise me what to do. I will cancel all R85's next week.

Looking at my revised post do you think there will be tax to pay? And if so, what, roughly, do think this would be?

antonic

I am not comfortable saying as I may get it wrong !

But if you use the info I provided you should be able to do it yourself.

ajw1100 wrote: »

Words of wisdom that I will act upon.

I had edited my post as you were replying to it, my apologies!

I think I had better write to HMRC and send copies of all my tax statements for the year 2010~2011 and let them advise me what to do. I will cancel all R85's next week.

Looking at my revised post do you think there will be tax to pay? And if so, what, roughly, do think this would be?