Paying tax on P2P savings & Personal Savings Allowanc

garreh

I have a RateSetter account that is paying interest gross of tax which I need to declare to HMRC as I am a basic rate tax payer. I currently do not fill in a self assessment. How would I do that for this tax year, would I just send them a letter and let them know?

As for next year I know there are some changes coming into force for the Personal Savings Allowance which means all banks will pay interest gross. How do HMRC intend to collect tax on anything outside the PSA? Do I need to take any action to inform them of my interest or will they automatically send me a P800 showing my underpaid tax?

Also I have another question in regards to the Personal Savings Allowance. If your interest takes you into a higher rate tax band, does this mean you will only get £500 allowance on all your interest, or are they separate? Even Martin doesn't seem to know !

Khrisjun

Regarding the Interest and tax being deducted, i receive interest gross from a different P2P site and i phoned through to HMRC, advised the amount and they sent a revised Tax Code for the extra to be collected through my work. This works if you are on PAYE, i dont believe its the same if your self employed and have to do a tax return anyway.

Unsure on your other points so i'm sure someone else will chip in ,

Cheers,
Khris

xylophone

https://www.gov.uk/register-for-self-assessment/not-self-employed

You could register for self assessment?

masonic

garreh wrote: »

As for next year I know there are some changes coming into force for the Personal Savings Allowance which means all banks will pay interest gross. How do HMRC intend to collect tax on anything outside the PSA? Do I need to take any action to inform them of my interest or will they automatically send me a P800 showing my underpaid tax?

I believe there is some sort of system in development, but failing that, you would probably need to declare it in the same way as those receiving gross income that is taxable need to do now.

Also I have another question in regards to the Personal Savings Allowance. If your interest takes you into a higher rate tax band, does this mean you will only get £500 allowance on all your interest, or are they separate? Even Martin doesn't seem to know !

I thought it was pretty clear that any savings income falling within the personal savings allowance is not counted. However, for an otherwise basic rate taxpayer, if you have income above the (£1,000) personal savings allowance that took you into higher rate tax, then your allowance would be reduced to £500.

xylophone wrote: »

https://www.gov.uk/register-for-self-assessment/not-self-employed

You could register for self assessment?

Unless the income cannot be coded in PAYE (i.e. someone who is not in normal employment), then it is not itself a valid reason for registering for SA.

garreh

masonic wrote: »

I believe there is some sort of system in development, but failing that, you would probably need to declare it in the same way as those receiving gross income that is taxable need to do now.

For those who do not do complete a self assessment what is correct way? Just a letter to let them know?

masonic wrote: »

I thought it was pretty clear that any savings income falling within the personal savings allowance is not counted. However, for an otherwise basic rate taxpayer, if you have income above the (£1,000) personal savings allowance that took you into higher rate tax, then your allowance would be reduced to £500.

I think maybe there's a misunderstanding what I'm asking. Let's say I earn exactly £31,785 as my base salary (which is £1 below the higher rate tax) then my interest I earn on my savings is £1000 which means my income is technically £32,785 meaning I am in a higher tax band.

The government (as far as I'm aware) haven't yet announced if the income generated by interest is separate or can indeed "push" you into a higher tax band. I would argue it's not particularly fair to penalise those savers who will be pushed into higher tax because of their savings, particularly as this new Personal Savings Allowance is there to reward savers and help reduce the pressure on HMRC tax declarations.

masonic

garreh wrote: »

For those who do not do complete a self assessment what is correct way? Just a letter to let them know?

A letter or a phone call.

I think maybe there's a misunderstanding what I'm asking. Let's say I earn exactly £31,785 as my base salary (which is £1 below the higher rate tax) then my interest I earn on my savings is £1000 which means my income is technically £32,785 meaning I am in a higher tax band.

The government (as far as I'm aware) haven't yet announced if the income generated by interest is separate or can indeed "push" you into a higher tax band. I would argue it's not particularly fair to penalise those savers who will be pushed into higher tax because of their savings, particularly as this new Personal Savings Allowance is there to reward savers and help reduce the pressure on HMRC tax declarations.

There is no misunderstanding and no penalisation. Tax is paid on the amount of taxable income remaining after allowances have been deducted. If you earn exactly £31,785 as your base salary, then you need to deduct your £10,600 personal allowance. You'll pay 20% tax on the £21,185 income above that. You will not hit the higher rate tax band unless you earn an additional £10,601 income (total income £42,385). Why would the Personal Savings Allowance be any different?

jem16

masonic wrote: »

There is no misunderstanding and no penalisation. Tax is paid on the amount of taxable income remaining after allowances have been deducted. If you earn exactly £31,785 as your base salary, then you need to deduct your £10,600 personal allowance. You'll pay 20% tax on the £21,185 income above that. You will not hit the higher rate tax band unless you earn an additional £10,601 income (total income £42,385). Why would the Personal Savings Allowance be any different?

I think the numbers used in the example were bad as of course that wouldn't make anyone a higher rate taxpayer.

However let's take an earned income of £42,380. If you had £1000 of gross interest then this would mean total taxable income of £43,380 so £995 of that interest would be subject to another 20% tax under the current system as you have become a higher rate taxpayer.

So does that £1000 Savings Allowance still get counted as total taxable income or is it discounted totally? The explanations for the Dividend allowance suggest that it will still count towards taxable income and not be like ISA interest which is discounted totally.

If so then it would only be a £500 allowance.

masonic

jem16 wrote: »

However let's take an earned income of £42,380. If you had £1000 of gross interest then this would mean total taxable income of £43,380 so £995 of that interest would be subject to another 20% tax under the current system as you have become a higher rate taxpayer.

So does that £1000 Savings Allowance still get counted as total taxable income or is it discounted totally? The explanations for the Dividend allowance suggest that it will still count towards taxable income and not be like ISA interest which is discounted totally.

If so then it would only be a £500 allowance.

My understanding is that it is the individual's marginal rate of tax that determines whether they get the £1,000 or £500 PSA. So, if all of their income falls within the basic rate band and personal allowances, they would get the £1,000 allowance. HMRC define the tax bands as being income above personal allowances (for example, see https://www.gov.uk/income-tax-rates/current-rates-and-allowances), so this seems pretty clear cut.

jem16

masonic wrote: »

HMRC define the tax bands as being income above personal allowances (for example, see https://www.gov.uk/income-tax-rates/current-rates-and-allowances), so this seems pretty clear cut.

I would agree provided it is being treated in exactly the same way as the tax-free personal allowance.

However until we see some actual worked examples for someone in this category, we can't be totally sure.

Archi_Bald

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414026/Savings_factographic_final.pdf

To be eligible for the £1,000 tax-free Personal Savings Allowance your taxable income needs to be less than £42,700 a year.

That seems pretty unambiguous to me. "Taxable income" is clearly defined, and definitely contains interest on savings.

masonic

Archi_Bald wrote: »

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414026/Savings_factographic_final.pdf

That seems pretty unambiguous to me. "Taxable income" is clearly defined, and definitely contains interest on savings.

I agree, that does seem very clear. So, marginal rate of tax could be a red herring.

Based on the above...
- You could earn £42,300 through employment, using up your personal allowance and £31,500 of the £31,900 basic rate tax band.
- The next £500 of interest would use up your Personal Savings Allowance of £500 and take your taxable income to £42,800

It seems clear the next £1 of employment income would leave the individual within the basic rate band...
but does the next £1 of savings income fall within the basic rate or higher rate band?