Personal Savings Allowance

SteveG787

Can somebody please explain or better yet point me to an official explanantion of this new PSA, none of the examples on the .gov site cover my situation. I'm retiring this year and have done a fair bit of planning already, I am now reviewing that against these new changes and I have come across this situation which will occur next tax year.

I had planned to draw a UPFLS of £20,000 next year, 25% tax free leaving £15,000 taxable income.

Add to that I expect a savings interest income of about £2500.

This gives me a taxable income of £17,500 which puts me over the £17,000 threshold and so the interest is taxable.

My reading of the .gov info is that the whole of the interest would be taxable not just the bit over £17,000 so that after applying the £1000 allowance I would have taxable interest of £1500.

Is this correct ?

This suggests to me that if I drawdown £500 less I would save £300 tax on the interest and £100 on the drawdown. So at a cost of £100 cash leave £500 more in the pension.

Does all of this make sense to anybody, I'm not sure it does to me, but that's what I've calculated. Or am I just getting confused ?

Shedman

My understanding is that as your non savings income of £15,000 is under £16,000 (ie PA of £11k plus £5k savings interest starting band) then, out of your £2500 interest, £1000 will be covered by the 0% savings starting band, £1000 by the new PSA and so you will only pay tax on the £500 excess (i.e. £100).

Clearly reducing your drawdown of taxable pension income by the £500 to £14,500 rather than £15,000 (that is draw £19,333 instead of £20,000 as 75% of 19,333 is taxable income of £14,500) this would get rid of that £500 savings interest excess and save the £100 tax (whilst leaving £667 extra in your SIPP).

This might help you especially example 2 at the bottom:

http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/

SteveG787

Thanks Shedman.

I made the mistake of looking at the .gov guidance https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

This just makes a statement of £17,000 and doesn't mention anywhere that it is made up of separate amounts.

It is clearer on the link you gave. Looks like I need to revisit my maths.

The main problem with all of this is the drawdown will happen at the start of the tax year and the interest accrue during the year and so will be difficult to adjust to avoid high marginal increases in the tax due. I'm trying to make a spreadsheet to track it during this year when the tax in unavoidable so that I am confident I can minimize my tax next year. I wish the government would just publish the raw maths formulae in some form rather than oversimplified explanations and examples that will only fit specific cases.

LXdaddy

See polymaff's excellent explanation here http://forums.moneysavingexpert.com/showpost.php?p=70422918&postcount=9

Shedman

SteveG787 wrote: »

Thanks Shedman.

I made the mistake of looking at the .gov guidance https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

This just makes a statement of £17,000 and doesn't mention anywhere that it is made up of separate amounts.

It is clearer on the link you gave. Looks like I need to revisit my maths.

The main problem with all of this is the drawdown will happen at the start of the tax year and the interest accrue during the year and so will be difficult to adjust to avoid high marginal increases in the tax due. I'm trying to make a spreadsheet to track it during this year when the tax in unavoidable so that I am confident I can minimize my tax next year. I wish the government would just publish the raw maths formulae in some form rather than oversimplified explanations and examples that will only fit specific cases.

With you on problems of estimating the interest to be received and timing of pension drawdowns, especially not knowing how long all these high rate current account deals will keep going.

Probably teaching my grandmother to suck eggs, but if your married (and trust the other half ) maybe move some of the savings into her name to try and utilise her nil rate savings band and PSA if you are not already doing so and so keep your combined tax at a minimum

SteveG787

Ok, so I looked at the links and drew the bar chart and got my head round it (a bit), then I did a spreadsheet to calculate it and got the same numbers as Shedman above and as the TaxVol website.

So I though I'd cracked it.

Then I found an HMRC calculater for checking you've paid the right tax http://stccalculator.hmrc.gov.uk/UserDetails.aspx

I put the numbers in as if it was this tax year and I'd already received everything. I ignored the tax free part of the UFPLS and entered the interest as gross. I got this -

Summary of Calculation for 6 April 2016 to 5 April 2017

Income
Total earnings before Tax taken off
£15,000.00

Total interest paid by a UK bank or building society (before Tax is taken off)
£2,500.00

Total Income
£17,500.00


less Personal Allowance(s)
Personal Allowance
£11,000.00

Total Allowance(s)
£11,000.00


Income on which Tax is due
£6,500.00


How your Income Tax has been calculated
Taxable employment income

£0.00 @ 0% = £0.00


£4,000.00 @ 20% = £800.00


£0.00 @ 40% = £0.00

Taxable interest paid by a UK bank or building society

£1,000.00 @ 0% = £0.00


£1,500.00 @ 20% = £300.00


£0.00 @ 40% = £0.00
Taxable Income
£6,500.00

Income Tax due
£1,100.00



less tax already taken off
Tax paid on earnings £0.00

Tax paid on UK bank or building society interest £0.00

Total tax already taken off
£0.00


So back to where I cam in at £300.

Somebody please shoot this down. I liked Shedmans version better.

(Sorry about the formatting, I couldn't find a way to just paste a screenshot)

xylophone

http://www.hmrc.gov.uk/manuals/saimmanual/saim1112.htm

You can adapt the above. Remember that the PA is now £11,000 and that for basic rate tax payers there is £1000 of PSA on top of the 0% Savings Band which operates where non-savings income is under £16,000.

Pension 15000

Interest 2500

TTI 17,500

Less PA (11000)

Taxable 6500

Tax

£4000 @ 20% (£16000 - £15000)

£1000 @ 0% (Savings Band Available)

£1000 @ 0% (PSA available)

£500 @20%

You would have paid your tax on your pension through the pension provider - your savings income will be paid gross, so you owe HMRC £100.

SteveG787

Ok, I've gotten to the bottom of this (I hope).

The HMRC Tax Checker calculator isn't applying the PSA, so is in fact wrong.

I thought it was applying it because of the line "£1,000.00 @ 0% = £0.00" but that was the remaining savings band available, the numbers I used just coincidentally came to £1000.

As an aside I'm an Engineer in real life (at least for another 3 months) and am used to things being described by maths but since looking at this whole pension and tax area, which I'd managed to ignore successfully for years, I am constantly amazed that all the explanations of what must be fairly straightforward maths formulae resort to ambiguous and unclear verbiage. Surely HMRC must have the formulae for their computer programs, why don't they just give that, then it's just maths with no ambiguity.

Anyway thanks for everyones help

joe134

xylophone wrote: »

http://www.hmrc.gov.uk/manuals/saimmanual/saim1112.htm

You can adapt the above. Remember that the PA is now £11,000 and that for basic rate tax payers there is £1000 of PSA on top of the 0% Savings Band which operates where non-savings income is under £16,000.

Pension 15000

Interest 2500

TTI 17,500

Less PA (11000)

Taxable 6500

Tax

£4000 @ 20% (£16000 - £15000)

£1000 @ 0% (Savings Band Available)

£1000 @ 0% (PSA available)

£500 @20%

You would have paid your tax on your pension through the pension provider - your savings income will be paid gross, so you owe HMRC £100.

Hi , can anyone tell me when the 0% savings band came in under £16k?
Was it when the 10p tax on interest was abolished?
HMRC figures quote tax year 15-16 example.
Was it in 14-15 tax year?:beer:

xylophone

Was it in 14-15 tax year?

See above (but for £15,500 read £15,600) - the 0% band applied from 6 April 2015.

mustafa

Hi,

I am still confused as from September this year my gross income will be £22,691.65 (3 private pensions + State pension) and will have approx £700pa paid in interest on bank accounts. I was led to believe that the first £1000 in interest was to be tax free. have checked and double checked on the gov web site and its as clear as mud, 1 page says £17,000 another on a fact sheet says £20,000.
If I have to pay 20% tax on the interest + the possibility of santander reducing the rate to 2% will have to check the alternative with isa?? or any other suggestions would be gratefully received.
Bill