Personal Savings Allowance/Tax Rate Query

nirish

So I am in the 40% tax bracket which means my PSA is £500

Anything earned above this which isn't tax protected I pay 40% on.

So my query involves if I move into the 100k+ income bracket my effective tax rate over 100k is 60% as they remove the personal allowance.

Does this mean that any interest I earn above £500 which isn't tax protected will be taxed at 60% or 40% ??

eskbanker

The rate itself is still 40% (until/unless you get to the 45% bracket) - the notional 60% effect you refer to just reflects the reduction in allowance, rather than affecting the actual rate charged.

So, your tax calculation will still revolve around totting up all taxable income, deducting all relevant allowances, and then applying tax at the stepped rates of 0/20/40%.

Dazed_and_confused

Remember the PSA isnt really an allowance it's actually a 0% rate band so in your situation I believe this will mean you have £500 income (the "PSA") which is still taxable income, albeit taxed at 0%, and this will be relevant for reducing your personal allowance over the £100,000 mark e.g it's the full amount of savings income which counts here, not just the bit that will be taxed at 40%

bowlhead99

Yes, all of your incremental income that's not tax protected will effectively get hit with 60% until you get to the other side of that band where you've fully lost your allowance.

Say you have total salary of 100k and total interest income of £500. The interest is covered by the £500 allowance and any more isn't covered and so is taxable. That means simplistically you have £100k of total taxable income before taking off your personal allowance.

Then let's say you get another incremental £2 of income -doesn't matter if it's a bonus at work, pay rise, or more bank interest earned.

What happens is:
You pay 80p tax on the £2 income because you're a 40% taxpayer (way above the 20% basic rate, way below the superhigh 45% rate)

You also lose £1 of your personal allowance as a consequence of getting the extra £2 income. As the total personal allowance fell by £1, you have another pound of your income that doesn't fit in the personal allowance nil rate, or the basic rate 20% band (which stays the same size) so effectively there's an extra pound of your existing income that's going to get taxed at 40p instead of 0p.

So your total tax on earning the extra £2 is the 80p tax at 40% on the £2 of new earnings, plus the 40p tax on the £1 of existing earnings which can't fit in the personal allowance any more. You pay 120p tax as a consequence of getting the £2 new income, which is an effective 60%.

But long story short, it doesn't matter whether that £2 new income is salary, bonus, P11D benefits like health insurance, or bank interest in excess of the £500 allowance - it's new taxable income that doesn't fit in any allowance, so it costs you 120p tax.

The £20k+ band in which you're losing the annual personal allowance is painful but on the flip side it is a good incentive to make pension contributions where you are effectively *saving* income tax at 60% on all contributions instead of if you were only earning £90k and only saved 40% on all contributions.

Same with giving to charity when your friends go off and do some fun run and there's a giftaid relief option when you sponsor them. There's never a better time to give away or pension-defer your income!

Dazed_and_confused

But the £500 is "taxable" so salary £100,000 and total interest for the year of £500 will result in loss of £250 of the personal allowance even though there is no tax to be paid on the interest (tax due on the interest being £500 x 0%)

bowlhead99

Dazed_and_confused wrote: »

But the £500 is "taxable" so salary £100,000 and total interest for the year of £500 will result in loss of £250 of the personal allowance even though there is no tax to be paid on the interest (tax due on the interest being £500 x 0%)

Curses, I couldn't remember that bit so was just going to go with £110k as the start point which would have still answered the OP's question [the effect of incremental income when you get into that "60% zone"]
but then I just went with £100k in a flawed attempt to try to keep things tidy.

Dird

A related point. If you change from a 20% job to a 40% job in a year, anybody know what PSA you would be entitled to?

darkidoe

This is giving me a headache.:o

grey_gym_sock

Dird wrote: »

A related point. If you change from a 20% job to a 40% job in a year, anybody know what PSA you would be entitled to?

it depends on your total taxable income during the tax year (6 april - 5 april).

Dird

grey_gym_sock wrote: »

it depends on your total taxable income during the tax year (6 april - 5 april).

hmm OK damn, hard to tell. Time for my mom to start using her allowance :money:

nirish

Ok thanks for the opinions/info.

I had started investing on SavingStream P2P but it seems there is little point in earning more than £500 interest there as I'll get hit with the effective 60% rate after that which definitely means it isn't worth the risk element. Shame

Time to start eyeing up the IFISA P2Ps as they launch I guess ....