Tax advice please

Roberta1

I earn just below the threshold before paying tax (£7475 I believe for this tax year). My earnings come from work and from savings interest.

I am about to increase my hours at work and believe this will tip me over the tax threshold by about £500.

My question is, am I better off shuffling money around to bring down my taxable savings interest (ISAs, offset account attached to mortgage), or just biting the bullet and paying tax on all my earnings?

My gut instinct at the moment is to pay off a chunk of the mortgage with some of our savings but I wondered what other people think.

Thanks,
Roberta

jennifernil

You won't pay tax on ALL of your income, only on that over the personal allowance of £7475.

So if you are £500 over that, then you will pay tax on £500. If you are entitled to the 10% savings rate, then you would pay £50 in tax.

Note also that ISA interest is not taxable, so should not be counted.

However.......if your taxable savings interest + your earned income will take you over the PA, you will need to withdraw your R85s, receive nett interest, and reclaim after the end of the tax year.

If you move more into ISAs, would that keep you below the PA?

If your mortgage rate is higher than your savings rate, then paying some of it off would make sense IMHO.

Mikeyorks

Comprehensive reply from Jennifer. So just to add that the 10% rate applies only to Savings interest. And this interest is the top slice of your income.

Therefore if your earned income (ISA interest isn't taxable and is ignored) doesn't exceed the personal allowance by more than £2560 :-

• all the interest below £7475 is tax free
• the interest that falls in the band £7476 to £10035 is charged at 10%
• any interest exceeding £10035 is charged at 20%.

Roberta1

Thanks for the replies. Very helpful.

I will probably only tip the personal allowance by a few hundred pounds!

So is it better to pay tax on this small amount, or potentially sacrifice some savings interest by shifting my money around to non-tax paying accounts?

CKhalvashi

Roberta1 wrote: »

Thanks for the replies. Very helpful.

I will probably only tip the personal allowance by a few hundred pounds!

So is it better to pay tax on this small amount, or potentially sacrifice some savings interest by shifting my money around to non-tax paying accounts?

If you’re sure that you won’t need access to the money, then I’d place this into a high interest ISA (provided you haven’t opened one already this year, of course), however my advice to you would be to place this money into an ISA anyway, as you most probably won’t earn enough to place the money back in. This is no disrespect to yourself, just a fact.

Either way, the difference will be minimal.

Chris

jennifernil

Without precise information on your various interest rates, and the amounts involved, it is impossible to calculate what you should do.

General advice, as you do have earned income, would be to place the maximum in your ISA every year.

Then I would be inclined to put as much as possible into the offset mortgage, especially if you can easily get it out again if required.

I would also keep enough easily available to cover unexpected spending (house, car etc)

Mikeyorks

Roberta1 wrote: »

I will probably only tip the personal allowance by a few hundred pounds!

So is it better to pay tax on this small amount, or potentially sacrifice some savings interest by shifting my money around to non-tax paying accounts?

I think that was adequately answered in post #2?

You appear to be paranoid about going over the PA threshold. Yet you've probably being doing yourself a disservice by holding money in tax free ISAs - at a lower rate than is generally available - when you had headroom up to your personal allowance.

We don't know your age / potential future earnings etc, without which it's difficult to be specific. But you should forget the tax threshold and maximise your interest. If you pay a bit of tax along the way - then join the rest of us! ISAs are not a panacea in a number of instances.