Paying tax on P2P savings & Personal Savings Allowanc

jem16

Archi_Bald wrote: »

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

Except of course interest from ISAs which is probably where the doubt is coming from.

In the case of someone with earned income of £42,380 plus £1000 gross interest it looks like they may only be entitled to £500 savings allowance as they are higher rate taxpayers courtesy of the interest. However that same person with £1000 ISA interest remains a basic rate taxpayer.

jem16

masonic wrote: »

but does the next £1 of savings income fall within the basic rate or higher rate band?

To me it would be higher rate.

Archi_Bald

jem16 wrote: »

Except of course interest from ISAs which is probably where the doubt is coming from.

In the case of someone with earned income of £42,380 plus £1000 gross interest it looks like they may only be entitled to £500 savings allowance as they are higher rate taxpayers courtesy of the interest. However that same person with £1000 ISA interest remains a basic rate taxpayer.

It isn't too surprising that ISA interest is tax free as that's the whole point of an ISA. Non-ISA interest has alway been counting as taxable income, and will continue to do so. The new allowance makes no fundamental difference to those principles. What am I missing.

Archi_Bald

jem16 wrote: »

To me it would be higher rate.

To me too.

jem16

Archi_Bald wrote: »

The new allowance makes no fundamental difference to those principles. What am I missing.

You're not missing anything as far as I'm concerned and I'm with you on how it will be handled.

However I can see some initial confusion with those close to higher rate.

masonic

jem16 wrote: »

Except of course interest from ISAs which is probably where the doubt is coming from.

In the case of someone with earned income of £42,380 plus £1000 gross interest it looks like they may only be entitled to £500 savings allowance as they are higher rate taxpayers courtesy of the interest. However that same person with £1000 ISA interest remains a basic rate taxpayer.

My confusion comes from the fact the personal savings allowance is being called an allowance, but applied in a manner more consistent with a relief.

To me it would be higher rate.

Perhaps, in which case you have the situation where...

Person A has a total taxable income of £43,198, which is made up of £42,699 of earnings and £499 of savings interest. They are still below the higher rate threshold, have paid no higher rate tax and would therefore be described as a basic rate taxpayer by most.

Person B has the same total taxable income of £43,198, but this time it is made up of £42,198 of earnings and £1,000 of savings interest. They would have to pay higher rate tax on £498 of their income, but still have £500 unused in their basic rate tax band.

jem16

masonic wrote: »

Person B has the same total taxable income of £43,198, but this time it is made up of £42,198 of earnings and £1,000 of savings interest. They would have to pay higher rate tax on £498 of their income, but still have £500 unused in their basic rate tax band.

I would be looking at that as £43,198 is taxable.

First £10,800 = 0%
Next £31,900 = 20%

Remainder is £498 which, as it is within the £500 Savings Allowance for a higher rate taxpayer, is not due any further tax.

if the taxable income had been £43,201 then the above calculations would still be the same but the remainder would be £501. So £500 allowance and £1 taxable at 40%.

jem16

Actually the above is probably not correct as I forgot the £1000 is paid gross so £500 would have to have tax of 20% paid on it.

I think!!

masonic

jem16 wrote: »

I would be looking at that as £43,198 is taxable.

First £10,800 = 0%
Next £31,900 = 20%

Remainder is £498 which, as it is within the £500 Savings Allowance for a higher rate taxpayer, is not due any further tax.

if the taxable income had been £43,201 then the above calculations would still be the same but the remainder would be £501. So £500 allowance and £1 taxable at 40%.

For a Total taxable income of £42,701 [£42,200 earnings + £501 interest], surely the breakdown is

£10,800 @ 0%
£31,401 @ 20%
£500 in savings allowance @ 0%.

i.e. overall the money added is being taxed at the basic rate until that band is used up.

Edit: now I'm confusing myself with all the different numbers . This is supposed to refer to the earlier scenario in which you said the next £1 would fall into the higher rate band.

jem16

masonic wrote: »

i.e. overall the money added is being taxed at the basic rate until that band is used up.

So the extra £1 is taxed at 20% because it had been paid gross but now due to pay 20% on it as some of the basic rate tax band is still to be used up?

Probably would agree now.

Edit: now I'm confusing myself with all the different numbers . This is supposed to refer to the earlier scenario in which you said the next £1 would fall into the higher rate band.

Don't worry - I've totally confused myself too.

This is really the problem as you have to first think about how much Savings Allowance you're entitled to and then to think about how the remainder should be taxed within the taxable income. I can foresee problems with those close to higher rate tax territory.

Then bring in the Dividend allowance and no-one will be able to follow it!