Who can claim £5,000 tax-free interest?

Kenhere

Hi, what are the criteria for being able to claim:
The £5,000 0% tax "starting rate" on interest?
The £1,000 "personal savings allowance"?
Thank you.

Sibbers123

You don't claim them as such - they are automatic if you qualify.

Not many individuals qualify for the starting rate. Your interest needs to fall within the first £5,000 of your taxable income which rules out 95% of the working population.

The personal savings allowance will depend on what type of tax payer you are (basic rate = £1,000, Higher rate = £500 and additional rate = £0).

eskbanker

As per https://www.moneysavingexpert.com/savings/tax-free-savings/, the £5K starting savings rate applies for those with (non-savings) earned income of less than their £11,850 personal allowance, but each £1 earned above that reduces the 0% starting savings rate by £1, so it doesn't apply at all for those earning £16,850 or more.

The £1K PSA applies to all basic rate taxpayers, reduced to £500 for those at the higher rate.

Further details at http://www.taxvol.org.uk/about-tax/entitled-10-band-savings-interest/ and https://www.litrg.org.uk/tax-guides/other-tax-issues/savings-and-tax.

ColdIron

Kenhere wrote: »

Hi, what are the criteria for being able to claim:
The £5,000 0% tax "starting rate" on interest?
The £1,000 "personal savings allowance"?
Thank you.

In simple terms ...

Starting Rate for Savings: Any part of your savings interest after earnings, pension etc that falls into a £5,000 band above your Personal Allowance will be taxed at 0%. For most people this will be between £11,850 and £16,850

Personal Savings Allowance: Basic rate tax payers - up to £1,000 of savings interest taxed at 0%. Higher rate tax payers - £500. Additional Rate - £0

https://www.gov.uk/apply-tax-free-interest-on-savings

xylophone

with (non-savings) earned income

Not only "earned" - see

https://www.litrg.org.uk/latest-news/news/160520-new-savings-and-dividend-tax-rules-–-essential-guide

Kenhere

OK thanks all. I have read the links and it looks complicated if you have income over £17,850, but if you are retired and total income from State Pension, "unwrapped" dividend income, and bank & p2p interest is £17,850 or less then you can have an income of all the following tax free:
Up to £11, 850 income (this can be a combination of state pension, interest, dividends.
Plus: up to £5,000 of interest
Plus: up to (another) £1,000 interest

Why are these two tax free interest allowances separated instead of a flat £6,000 interest allowance?

So if you utilise all the above you can max out £17,850 of tax free income.
But no-where above is the £2,000 dividend allowance mentioned. So if you utilise that, presumably your income goes up to £19,850 but you now lose some of your £5,000 interest allowance or the £1,000 interest allowance, or both?

triplea35

Ignore, Sorted.

eskbanker

Kenhere wrote: »

Why are these two tax free interest allowances separated instead of a flat £6,000 interest allowance?

As I said in my reply, the £1K PSA applies to all basic rate taxpayers (and £500 for higher rate) so is relevant for practically everybody, whereas the starting savings rate is a concession specifically aimed at low earners.

Kenhere wrote: »

But no-where above is the £2,000 dividend allowance mentioned.

Perhaps because you weren't asking about dividends?!

Kenhere wrote: »

So if you utilise that, presumably your income goes up to £19,850 but you now lose some of your £5,000 interest allowance or the £1,000 interest allowance, or both?

No, the dividend allowance relates only to dividends and so doesn't affect allowances relating to savings.

As ever, the convenient word 'allowance' isn't really accurate here, as these are nil-rate tax bands rather than allowances as such, but it's always difficult to condense relatively complex areas into bite-size chunks!

Kenhere

Thanks eskbanker
So it is possible to use the £2,000 dividend allowance in addition to the other tax allowances and achieve a total of £19,850 p.a. totally tax free?

ColdIron

Kenhere wrote: »

Why are these two tax free interest allowances separated instead of a flat £6,000 interest allowance?

The starting rate for savings is intended to benefit those on low incomes. If your earnings, pensions etc are more than £16,850 you can't use it. The personal savings allowance can be used by higher earners. E.g. you earn £30,000 you can utilise the PSA but not the SRS

But no-where above is the £2,000 dividend allowance mentioned. So if you utilise that, presumably your income goes up to £19,850 but you now lose some of your £5,000 interest allowance or the £1,000 interest allowance, or both?

You didn't ask about dividends. Savings allowances do not apply to dividends and vice versa. It's best to consider them separately from interest. Keeping it simple for illustration, you have a separate dividend allowance of £2,000. Using the example of £30,000 earnings, if you also receive £5,000 of dividends the first £2,000 are taxed at 0%, the remaining £3,000 will be taxed at your marginal rate so 7.5% in this example. If you were a higher rate tax payer the portion that falls above £46,350 would pay 32.5%

https://www.gov.uk/tax-on-dividends

colsten

Kenhere wrote: »

Thanks eskbanker
So it is possible to use the £2,000 dividend allowance in addition to the other tax allowances and achieve a total of £19,850 p.a. totally tax free?

It is. Not too many people will have very low income yet have enough unwrapped cash savings for £5K interest, and unwrapped investments yielding £2K dividends.