0% Starting Rate For Savings

dosh37

I'm struggling to get my head around the rules for tax on savings.
In particular the 0% starting rate.


Consider the following example:-
Personal Allowance = £11,850

Non-savings Income = £10,380
Savings Income = £8000
There are no other sources of income or expenses.


Is any tax due?


A number of articles suggest that you add £5000 to the personal allowance giving £16,850. If the non-savings income is less than this threshold then there is no tax to pay on any savings income.

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


Is this true if the savings income is large as in my example?


I have an excel tax spreadsheet that originally came from 'Which'.
This has been modified over the years to cope with the various tax changes including the removal of the 10% starting rate, so it may no longer be correct.

For my example it works out that £1530 is taxable at 20% = £306.


The calculation is carried out as follows:-
First it adds all the sources of gross income = £18380
It deducts the personal allowance giving a taxable income of £6,530
Then it deducts the £5000 threshold for the 0% starting rate for savings giving £1,530 which is then taxed at 20% giving the £306 tax figure.


Is this correct?




PS. I don't think the spreadsheet currently takes into account the £1000 personal savings allowance in situations where the 0% starting rate does not apply. That's a separate issue and something I should be able to fix later.

[Deleted User]

It's not entirely correct... you also have a £1000 PSA on top of the £5000. So, in your case deduct a further 1000 from 1530 leaving 530. This is your taxable income on which you pay £106 in tax.

dosh37

[quote=[Deleted User];75586912]It's not entirely correct... you also have a £1000 PSA on top of the £5000. So, in your case deduct a further 1000 from 1530 leaving 530. This is your taxable income on which you pay £106 in tax.[/QUOTE]


Yes - I added a 'PS' to my original post pointing out that the spreadsheet does not currently include the £1000 PSA. I wanted to make sure I understood how the 0% starting rate works before adding the PSA to the spreadsheet calculation.


The following comes from the article in the link I included in the original post:-



"The easiest way to establish if you qualify is to add up your non savings income, if it is below or within your personal allowance plus £5,000, £16,500 2017/18 then the Starting Rate for Savings will apply."


If you are right then the statement above cannot be true. It does not take into account the actual savings income. This is why I am confused.

Dazed_and_confused

The correct calculation in this example is,

Total income £18,380
Less PA £11,850
Income to be taxed = £6,530

£5,000 x 0% = £0 (savings starter rate)
£1,000 x 0% = £0 (savings nil rate)
£530 x 20% = £106

Total tax payable £106

This assumes the person concerned hasn't either applied for or received Marriage Allowance.

For comparison if the non savings income was say £13,000 the calculation would be,

Total income £21,000
Less PA £11,850
Income to be taxed = £9,150

£1,150 x 20% = £230 (basic rate)
£3,850 x 0% = £0 (savings starter rate)
£1,000 x 0% = £0 (savings nil rate)
£3,150 x 20% = £630 (savings basic rate)

Total tax payable £860

Dazed_and_confused

"The easiest way to establish if you qualify is to add up your non savings income, if it is below or within your personal allowance plus £5,000, £16,500 2017/18 then the Starting Rate for Savings will apply."


If you are right then the statement above cannot be true. It does not take into account the actual savings income. This is why I am confused.

Why does it need to take into account the actual savings income?

It is merely a method of establishing of the savings starter rate will apply. The fine detail such as how much of the savings starter rate would be available isn't mentioned.

dosh37

I just found this article from MSE:-



https://www.moneysavingexpert.com/savings/tax-free-savings/


If I've undersood it correctly, it appears to confirm that there would be some tax to pay (reduced by the £1000 PSA).


Why does tax have to be so complicated? :mad:



It would help if HMRC made their official self assessment calculator available before April. Then I wouldn't have to try and use out-dated spreadsheets or struggle with calculations by hand when trying to minimise the tax liability before the end of the tax year.

etienneg

I agree that this is a difficult area to get your head around. It's not helped by the fact that it produces anomalous results. (Maybe I shouldn't ask "Why" as regards taxation!)

Compare two people.
Person A has no savings and works to earn £16,850. He will pay £1,000 in tax.
Person B has huge savings that produce £16,850 interest and earns nothing. He will pay no tax.
Both have the same income, but B must surely be thought of as 'better off' whilst it is A that pays tax!

I'm not implying that B should pay tax on his capital. However, I fail to see why he should not be taxed when A is. If there is any logical reason, I'd be glad to hear it.

polymaff

etienneg wrote: »

I agree that this is a difficult area to get your head around. It's not helped by the fact that it produces anomalous results. (Maybe I shouldn't ask "Why" as regards taxation!)

Compare two people.
Person A has no savings and works to earn £16,850. He will pay £1,000 in tax.
Person B has huge savings that produce £16,850 interest and earns nothing. He will pay no tax.
Both have the same income, but B must surely be thought of as 'better off' whilst it is A that pays tax!

I'm not implying that B should pay tax on his capital. However, I fail to see why he should not be taxed when A is. If there is any logical reason, I'd be glad to hear it.

The answer is that, for most, their savings have already be taxed when originally earned.

etienneg

polymaff wrote: »

The answer is that, for most, their savings have already be taxed when originally earned.

Sorry, but this isn't an answer at all. I thought I had made quite clear that I wasn't suggesting taxation of the capital (which is what you correctly say has already been taxed when earned).

I'm just comparing the same amount of INCOME for two people, derived from different sources.

Presumable most people would agree that an income tax system should be based on rational principles rather than being arbitrary. Then the starting point is surely that our two people with equal incomes are taxed the same. If there is to be any deviation from this it requires justification. I accept that different people will have different opinions as to whether or not particular factors are sufficient justification for any particular deviation.

I easily see why some people would say that A and B should be taxed the same. I can see why some would argue that the "better off" person B should be taxed more (although I have already said I'm not suggesting this). What I'm asking is whether anybody can see a rational argument for taxing our "better off" person B LESS than person A, which is what our system does.

polymaff

etienneg wrote: »

Sorry, but this isn't an answer at all.

It is an answer - just one you don't agree with. It also happens, whether you agree with it or not, to be the reason given by HMT for relieving taxation on taxable savings income.

phillw

etienneg wrote: »

Compare two people.
Person A has no savings and works to earn £16,850. He will pay £1,000 in tax.
Person B has huge savings that produce £16,850 interest and earns nothing. He will pay no tax.
Both have the same income, but B must surely be thought of as 'better off' whilst it is A that pays tax!

I'm not implying that B should pay tax on his capital. However, I fail to see why he should not be taxed when A is. If there is any logical reason, I'd be glad to hear it.

Person A will become a burden on the state when they retire, Person B won't.