Personal Savings Allowance - Higher Tax Bracket Question

abh1982

Afternoon All

I am really struggling to get my head round this and hope someone can help.

Following a job change, I am now earning slightly into the higher rate tax bracket 2019/20 amounts (£53k). I already do salary sacrifice pension and don't want to contribute any more so no way of reducing under the 40% amount.

Previously, i used to bolster my savings by using a combination of higher rate current accounts and 2-3 regular savers, which earned me around £900 in interest each year, so under the £1000 personal savings allowance at the 20% tax rate. I had ditched ISA's a while back due to the personal allowance. Now i have changed jobs my tax code has been adjusted to claim back tax from savings, as i believe i now have a personal savings allowance of £500, irrespective of how much i earn over £50k.

What i am trying to work out, is it better to carry on going with regular savers/high interest current accounts and accept the extra tax (where previously i earned about £900/year) or should i work it to earn under £500 from current/regular savers and stick the rest in a 1.4% ISA (seems about the best rate at the moment) and avoid tax at all.

Some of Martin's articles seem to imply more interest is still better but i can't get my head around the tax implications...

Thank you for any help
:beer:

Cheers

As i understand it, now i am earning an amount

Dazed_and_confused

There is no "allowance" for taxable savings interest.

Some may be taxed at a 0% tax rate courtesy of the savings nil rate of tax (aka Personal Savings Allowance) so in your situation the tax on £900 would be,

£500 x 0% = £0.00
£400 x 40% = £160.00

Effective tax rate on £900 is c18%

But if you are in a family receiving Child Benefit then the £900 is part of your adjusted net income which determines any High Income Child Benefit Charge due so you would have an additional 9% of your Child Benefit to repay as a direct result of having this £900 taxable savings interest. So if you get Child Benefit for 3 kids then the HICBC could be more than the income tax payable.

Albermarle

As an example :

Savings of £36K , earning 2.5% = £900 pa interest Now you have to pay £160 tax so net interest = £740. So the effective interest rate is 2.05%..
If you change to a cash ISA at 1.4% , you will earn 1.4%. = £504

Alternatively savings of £20K at 2.5% earns £500 and no tax to pay .
The remaining £16K at 1.4% in a cash ISA earns £224.
So £724 by this method, slightly less than by leaving it all in the 2.5% non isa account.
However if your savings are likely to increase in future then the balance would switch in favour of the latter calculation.