Managing your PSA

oli356

How do people manage their PSA to make sure they don't exceed it? I will be a higher rate tax payer with my new salary starting this month so my PSA is £500. I could possibly salary sacrifice more towards my pension however I've only a few days left of the window to change the pension contribution and I'm unsure of a few things so going to leave it for now.

In the past few weeks I've opened up a bunch of regular savings / savings accounts and tried to calculate how much interest will be saved on each (assuming max payments on all of them):

TSB Classic Plus (3% up to £1,500): £45 interest
Nationwide FlexDirect (5% up to £2,500) £125 interest
HSBC Regular Saver (2.75%/£250 per month): £44.69 interest
Principality Regular Saver Bond 20 (2% £500 per month): £64
Coventry Building Society Savings (2.5% variable, £500 per month): £81.27

So £360 ish on interest assuming my calculations are correct. This gives me £140 left of the PSA which could be £8500 at 1.6% in a another account as an example. In reality I might need some of my current savings moving forwards as majority of income from now on will be going off to the savings accounts listed above. But as long as I don't have more than £8600 in the saving account at any one time and interest is less than 1.6%, I shouldn't exceed my PSA... I think ?
My main current account is Monzo which gives no interest, so I shouldn't be earning any there.

The rest of my savings I will need to move to an ISA or invest.

Appreciate any feedback on if there is an easier way to keep track of this kind of stuff and if my figures don't look right (I'm new to all this ) then please let me know.

masonic

I've never tried to stay within my PSA. I'd rather pay tax on some of my income than forego that income.

eskbanker

I'd suggest that rather than looking at this specifically as an exercise in reducing taxable savings interest to £500, it's probably better to aim to maximise overall net return. It certainly doesn't make sense to use PSA as a threshold above which you'd invest rather than saving, as these are fundamentally different activities that shouldn't be unduly influenced by a fairly arbitrary figure set by HMRC....

YorkshireBoy

There's only 3 months of the current tax year left, so any 40% liability would be small I would have thought?

But if your employers scheme payroll window closes soon, can you not make a lump sum payment to the provider between now and 5th April once you know what your liability is likely to be?

oli356

eskbanker wrote: »

I'd suggest that rather than looking at this specifically as an exercise in reducing taxable savings interest to £500, it's probably better to aim to maximise overall net return. It certainly doesn't make sense to use PSA as a threshold above which you'd invest rather than saving, as these are fundamentally different activities that shouldn't be unduly influenced by a fairly arbitrary figure set by HMRC....

masonic wrote: »

I've never tried to stay within my PSA. I'd rather pay tax on some of my income than forego that income.

Maybe my understanding is wrong on this. I thought the logic would be, use up the PSA on savings accounts where you can get 1.9-5% interest and once PSA has been used, then move to a cash ISA.


So lets say I earned £500 interest on the multiple savings accounts I have. But I had 20k left I wanted to do something with (for the sake of argument the new tax year just started).

£20k at 1.4% is £280 interest in a 1 year cash ISA, tax free
on the other hand, the top 1 year savings account with BLME is 1.8%.

£20k at 1.8% is £360 interest (£80 more than cash ISA) and my PSA has now been exceeded as I've earned £580 interest. Interest at basic rate would be £72, so slightly better off still than the cash ISA. But at 40% the cash ISA would make more sense wouldn't it?

What am i missing here ?

oli356

YorkshireBoy wrote: »

There's only 3 months of the current tax year left, so any 40% liability would be small I would have thought?

But if your employers scheme payroll window closes soon, can you not make a lump sum payment to the provider between now and 5th April once you know what your liability is likely to be?

Not sure on that .. not sure if its possible to pay a lump sum to the provider, currently I pay 3% per month, company pays 8% or something. I've not been able to get onto the pension provider to check all day..

eskbanker

oli356 wrote: »

Maybe my understanding is wrong on this. I thought the logic would be, use up the PSA on savings accounts where you can get 1.9-5% interest and once PSA has been used, then move to a cash ISA.


So lets say I earned £500 interest on the multiple savings accounts I have. But I had 20k left I wanted to do something with (for the sake of argument the new tax year just started).

£20k at 1.4% is £280 interest in a 1 year cash ISA, tax free
on the other hand, the top 1 year savings account with BLME is 1.8%.

£20k at 1.8% is £360 interest (£80 more than cash ISA) and my PSA has now been exceeded as I've earned £580 interest. Interest at basic rate would be £72, so slightly better off still than the cash ISA. But at 40% the cash ISA would make more sense wouldn't it?

What am i missing here ?

As far as I'm concerned you're not missing anything now, as this is what I was suggesting - perhaps just interpretation, but to me this more recent post is different from what you'd originally proposed, which implied that once you reached PSA, you'd only be interested in ISAs as a point of principle rather than actually evaluating net return.

In your example, where interest from a cash ISA beats taxed interest in a directly equivalent non-ISA then the former makes more sense, but if, for the sake of argument, you chose to open another regular saver at 2.75%, you'd earn more on that than the ISA even if taxed at 40%.

oli356

eskbanker wrote: »

As far as I'm concerned you're not missing anything now, as this is what I was suggesting - perhaps just interpretation, but to me this more recent post is different from what you'd originally proposed, which implied that once you reached PSA, you'd only be interested in ISAs as a point of principle rather than actually evaluating net return.

In your example, where interest from a cash ISA beats taxed interest in a directly equivalent non-ISA then the former makes more sense, but if, for the sake of argument, you chose to open another regular saver at 2.75%, you'd earn more on that than the ISA even if taxed at 40%.

Aha right yes, I'm with you now. So yes I wasn't evaluating the net return.

So seems like a 2.34~% saver with 20k at 40% tax would be the point where the savings account wins over the ISA.
Both First Direct and M&S do 2.75% if you switch, but I don't know if I can be bothered to try get 2 more donor accounts and switch to them just to put in a couple of grand each.

On the savings account page on MSE, would need to go for a 5 year fixed rate with UBL UK, the only one which is higher than 2.34%. Maybe there is some I've missed but as a place to put in a lump amount, looks like the ISA is winning.

masonic

oli356 wrote: »

On the savings account page on MSE, would need to go for a 5 year fixed rate with UBL UK, the only one which is higher than 2.34%. Maybe there is some I've missed but as a place to put in a lump amount, looks like the ISA is winning.

If you were considering a 5 year fix, it would only be fair to compare like with like, so a higher rate taxpayer would need to find a rate of 3.3% outside of a cash ISA to compete with UBL's 2.03% 5 year fixed ISA. I'm not sure I'd rush to fix for 5 years at current rates though.

oli356

masonic wrote: »

If you were considering a 5 year fix, it would only be fair to compare like with like, so a higher rate taxpayer would need to find a rate of 3.3% outside of a cash ISA to compete with UBL's 2.03% 5 year fixed ISA. I'm not sure I'd rush to fix for 5 years at current rates though.

Yeah, I don't fancy putting cash away for 5 years at that rate... will leave the 5+ year for when I decide if/how much I want to invest in S&S.

Where is my maths failing me though with what you said...(assuming I understand correctly)

£1k cash at 2.03 is £20.30 - 20% tax (£4.06) so net interest = £16.24
£1k cash at 3.30 is £33 - 40% tax (£13.20) so net interest = £19.80

Wouldn't the 40% tax need more like 2.7%?

Dazed_and_confused

Have you checked that income within your savings nil rate band (aka Personal Savings Allowance) won't actually increase your overall tax liability?

There are a variety of situations where savings income taxed at 0% increases your tax liability.

They don't affect everyone but some aren't unusual and impact those with larger incomes and can mean that the £500 taxed at 0% increases the tax due by £100, an effective rate of 20%.