Tax on savings interest

ceegee

I would be very grateful if someone could outline the tax liability in the following situation. (I have visited HMRC website and am completely confused!:o)


If a person (let's call him Fred) earns £7000 p/a from his job, he pays no income tax as he is within his personal allowance. However, Fred now also gets £1800 p/a interest on his savings following a recent inheritance. This makes Fred's total annual income £8800, which is above his personal allowance. Fred gets no tax credits/benefits or anything like that.

What is Fred's tax liability now that his income exceeds his annual personal allowance?

SnowMan

If we are assuming standard personal allowance of £7,475 and this tax year:

Then assuming that the interest of £1,800 is gross interest (i.e. he has registered for tax to be paid gross) then

Taxable income is (7000 + 1800 - 7475) = 1,325

This is taxed at the 10% rate because the non-savings income of £7,000 is below the personal allowance of £7,475 and the taxable income of £1,325 is below the 10% rate band of £2,560. Had the £8,800 been made up of £8,000 earnings and £800 savings instead it would have been taxed at 20%.

So tax = 0.1 * 1325 = 132.50

See this page of the HMRC website.

It is quite confusing on whether the £1,325 is taxed at 10% or 20% (it is for me also) so while I think this is correct I would wait for someone to confirm that or repost in the tax forum where it may be seen by those with tax expertise.

Fred should incidentally be de-registering from receiving his savings interest tax gross and will either need to complete an R40 or full tax return after the end of the tax year so that the 10% tax ban can be correctly applied

Like the signature by the way , let it snow indeed :T

AirlieBird

SnowMan wrote: »

so while I think this is correct I would wait for someone to confirm that

Yes, you are correct.

SnowMan wrote: »

Had the £8,800 been made up of £8,000 earnings and £800 savings instead it would have been taxed at 20%.

No, not quite. You were doing so well too.:p Earnings is taxed first. As £545 of earnings is above the personal allowance, tax is charged on that £545 at 20%. Savings interest is taxed next. As the total taxable income is below the 10% savings band all the savings interest is taxed at 10%.

SnowMan

AirlieBird wrote: »

No, not quite. You were doing so well too.:p Earnings is taxed first. As £545 of earnings is above the personal allowance, tax is charged on that £545 at 20%. Savings interest is taxed next. As the total taxable income is below the 10% savings band all the savings interest is taxed at 10%.

Thanks for correcting that :beer:

opinions4u

If there isn't a 10p income tax rate anymore, retaining the 10p tax rate on unearned income seems to achieve little more than excessive complexity.

If I was in charge, I'd scrap it and use the money saved (which would be little) to increase the tax threshold.

xylophone

http://www.hmrc.gov.uk/tdsi/example25.htm

NB The allowance figures in this example are for 08-09 so you need to put in the current (11-12) figures from http://www.hmrc.gov.uk/rates/it.htm - 10% rate in chart at the end of the page.

le_loup

opinions4u wrote: »

If there isn't a 10p income tax rate anymore, retaining the 10p tax rate on unearned income seems to achieve little more than excessive complexity.

It's strange what complexities are achieved because it appears to be so hard for politicians to sit down and start from first principals. I guess most tax legislation comes through correcting c0ck ups like this and to close the workarounds that clever people think up to avoid paying.
I wonder what it would take to put it right? A superman who doesn't want to be re-elected, I guess ........ perhaps a Super Mario could work here too!

Mikeyorks

opinions4u wrote: »

If there isn't a 10p income tax rate anymore, retaining the 10p tax rate on unearned income seems to achieve little more than excessive complexity.

Fully concur with the fact that this appears unnecessarily complex. But I think Treasury were so concerned at the impact on people (pensioners in the main) with limited income and who rely on income from savings - that they managed to hold onto this whilst Gordon Brown was screwing up the abolition of the 10% tax rate. It's hardly the most complex of tax issues - but it's complex enough that most of its target population are oblivious of it! Despite multiple initiatives (and costly) to educate them via varous Taxback campaigns ...... most remain steadfastly oblivious.

But I think there are still enough (maximum benefit £2560 @ 10% = £256) beneficiaries that the sums aren't that small.

Perhaps a starting point on ridding PAYE of unnecessary complexities is to lose the 'laundering your uniform' allowances - where there are hugely varying allowances depending on whether you're a fireman or wear an asda T shirt. All of these allowances have to be claimed and maintained and the admin cost alone must be horrific. From spending much time on the 'Cutting Tax' forum - it appears most of the working population claim! And I'm still bemused as to why eg airline stewardesses need, or merit, assistance with laundering their blouses.

le_loup

Mikeyorks wrote: »

And I'm still bemused as to why eg airline stewardesses need, or merit, assistance with laundering their blouses.

Flight engineers' greasy hands?

Mikeyorks

le_loup wrote: »

Flight engineers' greasy hands?

Touche ! And worth £60 of anyone's allowance.

ceegee

SnowMan wrote: »

Fred should incidentally be de-registering from receiving his savings interest tax gross and will either need to complete an R40 or full tax return after the end of the tax year so that the 10% tax ban can be correctly applied

Like the signature by the way , let it snow indeed :T

Many thanks for the information and the link.:)

It really does seem to be a fairly unknown thing, this 10% savings tax business. It looks like Fred will have to claim something back next May, then.

I hope you don't mind if I pinch your idea of a snowman to embellish my signature.:snow_laug