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2016 no tax on first £1000 interest earned

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  • [Deleted User]
    [Deleted User] Posts: 0 Newbie
    Part of the Furniture 1,000 Posts Name Dropper Photogenic
    edited 12 February 2016 at 6:03AM
    Nuffpaid wrote: »
    Zagfles, thank you for your reply, I am however still not sure I understand.
    If I earn £42,000 salary and interest of £2000 this would place me in the 40% tax bracket at £44,000 income.
    Do you then have to pay 40% tax on all £44,000 or are you charged tax at 40% on the portion of interest that placed you in the 40% bracket?
    In my mind there is a big difference!

    Hope that makes sense.

    Personal Allowance £11,000

    Tax rates 2016/17

    Basic rate 20% Higher rate 40%

    Tax bands 2016/17

    Basic rate band £0-32,000 Higher rate band £32,001-150,000

    Link.
  • soapy9990
    soapy9990 Posts: 2 Newbie
    edited 11 February 2016 at 3:17PM
    Hi
    I am a newby to this forum but am trying to sort out tax/savings for next year. The HMRC latest advice says interest on "most types of purchased annuities" is included. I have just called my annuity provider (Canada Life) and they seem to have no idea. I presume they are supposed to pay some or all of the annuity without a tax deduction.
    Anybody know anything?
    Thanks
    S
  • xylophone
    xylophone Posts: 45,615 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    http://www.canadalife.co.uk/canada-life/Products/documents/PLA%20Product%20Details.pdf

    It appears from this that the "income element" (the amount after the tax free "return of capital" element, is regarded by Canada Life as Interest.

    If this is the case, then it would appear that the "income element" should also be paid gross from 6 April.

    It is surprising that Canada Life cannot clarify this point for you - perhaps you should put your question in writing so that somebody with some knowledge of the situation in your particular case can investigate and give you a definitive reply.
  • Eco_Miser
    Eco_Miser Posts: 4,853 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    edited 8 August 2024 at 1:41PM
    Tax rates 2016/17

    Basic rate 20% Higher rate 40%

    Tax bands 2016/17

    Basic rate band £0-32,000 Higher rate band £32,001-150,000

    Link.
    To be clear, these tax bands are in your taxable income, the first £11,000 (normally) is not taxable, so if your total income is below £43k you don't pay higher rate tax.
    Eco Miser
    Saving money for well over half a century
  • LXdaddy
    LXdaddy Posts: 693 Forumite
    Tenth Anniversary Combo Breaker
    edited 8 August 2024 at 1:41PM
    Personal Allowance £11,000

    Tax rates 2016/17

    Basic rate 20% Higher rate 40%

    Tax bands 2016/17

    Basic rate band £0-32,000 Higher rate band £32,001-150,000

    Link.


    I am however still not sure I understand.
    If I earn £42,000 salary and interest of £2000 this would place me in the 40% tax bracket at £44,000 income.
    Do you then have to pay 40% tax on all £44,000 or are you charged tax at 40% on the portion of interest that placed you in the 40% bracket?
    In my mind there is a big difference!

    Hope that makes sense.
    If you earn £42,000 the tax calculation is
    1 to 11,000 at 0%
    11,001 to 42,000 (ie £31,000) at 20%

    You only pay 20% tax on the income in the basic rate tax band, not on the whole of your income.


    if your salary was £44,000 the calculation would be
    1 to 11,000 at 0%
    11,001 to 43,000 (ie £32,000) at 20%
    43,001 to 44,000 (ie £1,000) at 40%

    You only pay 40% tax on the income in the higher rate tax band not on the whole of your income.



    If you have £42,000 of salary and £2,000 of interest then I BELIEVE the calculation would be...
    the £42,000 would be
    £11,000 tax free
    £31,000 at 20%
    You then have £1,000 of interest tax free and the remaining £1,000 of interest would be taxed at 40%

    EDIT - the above para is incorrect see post #100


    At no time would ALL your income be taxed at the higher rate 40%
  • 6022tivo
    6022tivo Posts: 813 Forumite
    Part of the Furniture 500 Posts Name Dropper Combo Breaker
    This is going to be annoying. I am currently PAYE on the standard rate.
    Most banks are not going to tax, and therefore pay me the gross interest. Unfortunately my gross interest payments are going to be over £1000 a year. Sounds like I may have to fill out a tax return?? Is this correct?
  • colsten
    colsten Posts: 17,597 Forumite
    10,000 Posts Seventh Anniversary Photogenic Name Dropper
    6022tivo wrote: »
    This is going to be annoying. I am currently PAYE on the standard rate.
    Most banks are not going to tax, and therefore pay me the gross interest. Unfortunately my gross interest payments are going to be over £1000 a year. Sounds like I may have to fill out a tax return?? Is this correct?

    All banks will be paying interest without tax deduction. As has been posted several times, those fortunate enough to earn more interest than their PSA might have to make a self assessment or they might be able to report in their Personal Tax Account. Either way, it won't be a lot of work for them, and some 95% of the population won't need to declare anything as they won't be making more than the PSA. Be glad you are one of the blessed, and don't expect that the processes will be adjusted to suit the 5% that earn more interest than their PSA. I am one of the lucky ones, and I am not complaining.
  • zagfles
    zagfles Posts: 21,448 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    LXdaddy wrote: »
    If you have £42,000 of salary and £2,000 of interest then I BELIEVE the calculation would be...
    the £42,000 would be
    £11,000 tax free
    £31,000 at 20%
    You then have £1,000 of interest tax free and the remaining £1,000 of interest would be taxed at 40%
    No you'd only get £500 of interest tax free, £500 would be taxed at 20%, and £1000 at 40%.
  • LXdaddy
    LXdaddy Posts: 693 Forumite
    Tenth Anniversary Combo Breaker
    edited 13 February 2016 at 2:35PM
    If you have £42,000 of salary and £2,000 of interest then I BELIEVE the calculation would be...
    the £42,000 would be
    £11,000 tax free
    £31,000 at 20%
    You then have £1,000 of interest tax free and the remaining £1,000 of interest would be taxed at 40%
    zagfles wrote: »
    No you'd only get £500 of interest tax free, £500 would be taxed at 20%, and £1000 at 40%.

    Yes, zagfles I think you are right. I think the fact that the total income is above £43,000 means you reach the Higher Tax Band so only get the smaller £500 Personal Savings Allowance.

    This would make the calculation for someone with £42,000 of salary and £1,000 of interest would be
    £12,000 tax free
    £31,000 at 20%

    But someone with £42,000 of salary and £1,001 of interest would be
    £11,500 tax free
    £31,500 at 20%
    £1 at 40%


    edit note - I originally had a typo of £11,001 interest - should have been £1,001
  • As I understand it, HMR are informed of all your banking interest payments via your NI number (confirmed when I recently spoke to HMR).
    Obviously, up until April this year, this has been irrelevant for most tax payers, as the tax element of the interest was taken out at source by the banks.
    However, when HMR send out your tax code for 2016/17, check the 'less untaxed Interest amount' because anything over £1000 will reduce the amount you earn before paying tax by changing your tax code. This 'less untaxed interest amount' is generated by your bank(s) communication with HMR and could be a few years out of date.
    If you ask them to, HMR will set this to 0. If then HMR are informed over the tax year that your interest payments have exceeded £1000, they will change your tax code to reflect this.
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