Tax on Savings

Sueluce

Could anyone help me with a tax problem? I am a low earner having recently retired. My total income (pension) is just lower than my personal allowance of 12500, but I do have savings. HMRC have just told me that because I do not pay tax, I do not qualify for my personal savings allowance and therefore I would have to pay tax on all my savings interest - presumably if my annual interest was £1000, I would have to pay tax of £200. Is this correct? Doesn't seem right. Thanks in advance

eskbanker

Sounds like a misunderstanding - depending on exactly how much savings interest income you're anticipating it's possibly true that the personal savings allowance as such doesn't apply but that you still wouldn't pay tax on the savings if you're able to take advantage of the starting savings rate of up to £5,000 at 0%.

This is explained in more detail at https://www.moneysavingexpert.com/savings/tax-free-savings/, but feel free to post more details about your income from all sources and someone can confirm the tax implications....

ColdIron

While you may not qualify for the Personal Savings Allowance it would appear that you are eligible for the Starting Rate for Savings, a £5,000 band above the Personal Allowance for savings interest taxed at 0%

https://www.gov.uk/apply-tax-free-interest-on-savings
https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

NB The HMRC link has not been updated to reflect the £12,500 Personal Allowance 2019/2020

Dazed_and_confused

As others have said you probably cannot make use of the Personal Savings Allowance (actually a 0% tax rate) but you can use the savings starter rate where upto £5,000 of taxable interest is taxed at 0%.

How much interest do you expect to receive in 2019:20?

What prompted HMRC to tell you this, seemingly incorrect, information?

Sueluce

Dazed_and_confused wrote: »

As others have said you probably cannot make use of the Personal Savings Allowance (actually a 0% tax rate) but you can use the savings starter rate where upto £5,000 of taxable interest is taxed at 0%.

How much interest do you expect to receive in 2019:20?

What prompted HMRC to tell you this, seemingly incorrect, information?

Expected interest for 19/20 is no more than £1,000. I rang HMRC, because they have reduced my personal allowance by £168, because of estimated untaxed interest on savings for this tax year (19/20). They told me nothing of the Savings Starter Rate and have insisted that my tax code should be reduced because of my expected interest earnings of £168.

Sueluce

eskbanker wrote: »

Sounds like a misunderstanding - depending on exactly how much savings interest income you're anticipating it's possibly true that the personal savings allowance as such doesn't apply but that you still wouldn't pay tax on the savings if you're able to take advantage of the starting savings rate of up to £5,000 at 0%.

This is explained in more detail at but feel free to post more details about your income from all sources and someone can confirm the tax implications....

Expected interest for this tax year is no more than £1,000. How would I "take advantage of" the Starting Savings Rate? Income from pensions will be just under my personal allowance of £12,500.

Dazed_and_confused

I'm going to hazard a guess that your estimated pension income in 2019:20 is £12,332.

And your new tax code for 2019:20 is 1233L.

Which would mean you would pay no tax on your pension.

Can you confirm your expected pension and tax code for 2019:20?

There is nothing you need to do to take advantage of the savings starter rate of tax, HMRC will take in into account when reviewing your tax position. For example in 2019:20 your overall tax liability might be as follows,

Pension £12,332
Interest £1,000
Total income £13,332
Less Personal Allowance £12,500
Income to be taxed £832
£832 x 0% (savings starter rate) = £0.00

LobsterMemory

So, in other words,

1 Yes, you will have to pay tax on all your savings
2 For the first £5000, the tax rate is 0% so you pay no tax on your savings

Sueluce

Dazed_and_confused wrote: »

I'm going to hazard a guess that your estimated pension income in 2019:20 is £12,332.

And your new tax code for 2019:20 is 1233L.

Which would mean you would pay no tax on your pension.

Can you confirm your expected pension and tax code for 2019:20?

There is nothing you need to do to take advantage of the savings starter rate of tax, HMRC will take in into account when reviewing your tax position. For example in 2019:20 your overall tax liability might be as follows,

Pension £12,332A
Interest £1,000
Total income £13,332
Less Personal Allowance £12,500
Income to be taxed £832
£832 x 0% (savings starter rate) = £0.00

Estimated Pension income £12,500 (annuity and drawdown).
Estimated Savings Interest £1,000.
Tax Code is 1219L. HMRC have put a deduction on because of the estimated interest they think I will earn based on last year (which is much lower than the current year). In the 45+ minutes I was talking to them, not once did they mention the Savings Starter Rate. I just don't know who I can talk to about it.

Dazed_and_confused

Estimated Pension income £12,500 (annuity and drawdown).

If you have two pensions you should have two tax codes but you only mention one, 1219L.

How is the £12,500 (pension income) split between the annuity and drawdown?

Have you looked at your personal tax account to see how much HMRC have estimated each pension to be in this tax year?

Part of the problem is that they may have got this wrong (drawdown is tricky to estimate as you could change the amount every month if you wanted!).

Based on what you have posted so far the savings starter rate of tax will mean you owe no tax on your interest.

You should be aware that each £1 your pension income (or wages if you got a part time job) which exceeds £12,500 reduces the £5,000 savings starter rate band by £1 but this is unlikely to be a problem for you, particularly as if you lost the ability to use it (for example if your pension income was £17,500) you would still have the savings nil rate of tax where upto £1,000 of interest is taxed at 0%.

Sueluce

Only a monthly amount coming in at the moment, which won't change totalling £8.5k. The drawdown hasn't been setup yet, but when it is, won't be any more than £4k (for this tax year). So only one code of 1219L.

Do not intend to have any other income.

So why are the HMRC reducing my tax code? I don't understand it.