Personal Savings Allowance question

MIZZ12

Hi, my basic salary puts me in the higher rate tax bracket; however, I have recently started contributing a large proportion of my salary into my pension (I have a pension through my employer) which has reduced my taxable income so that I am now in the basic rate tax bracket and no longer paying higher rate tax.  So what I was wondering is, what are the implications for my Personal Savings Allowance as I can't seem to find guidance on the internet for this scenario?  So if over the course of this tax year, my total taxable income falls within the basic rate bracket (due to me paying large pension contributions), does this mean that I am eligible for the higher PSA pf £1,000 rather than £500?  And when I say 'total taxable income' I believe that this should include income from savings, but what about dividends - do I include this in the total too?
Thank you!

eskbanker

Yes, dividends are similar to savings in that (outside ISAs or pensions) they're taxable income, even if the bottom slice is taxed at 0%.  The size of that slice does depend on total taxable income, so yes, if that is below the higher rate threshold then the savings band is £1,000 rather than £500.

masonic

Yes, dividends (even those falling within the so called "Dividend Allowance", which is not an allowance but a nil rate band) must also be included in your total income for the year to determine your marginal rate of tax. Obviously don't include anything sheltered in an ISA. Presumably you are contributing to your pension via salary sacrifice so that it has the effect of reducing your employment income.

MIZZ12

masonic said:

Yes, dividends (even those falling within the so called "Dividend Allowance", which is not an allowance but a nil rate band) must also be included in your total income for the year to determine your marginal rate of tax. Obviously don't include anything sheltered in an ISA. Presumably you are contributing to your pension via salary sacrifice so that it has the effect of reducing your employment income.

Thank you.  Yes, my pension contributions are effectively reducing my taxable income, so I guess that must be via salary sacrifice, if that is the definition?  So just to clarify, if my taxable income after my pension contributions lowers my income to basic rate tax threshold, that means I am eligible for the £1,000 PSA?

masonic

MIZZ12 said:

So just to clarify, if my taxable income after my pension contributions lowers my income to basic rate tax threshold, that means I am eligible for the £1,000 PSA?

Provided your dividends and interest don't tip you over the higher rate threshold, then yes you'll be eligible for the higher PSA.

Albermarle

Yes, my pension contributions are effectively reducing my taxable income, so I guess that must be via salary sacrifice, if that is the definition?

If you look at your pensions info/statement and there no contributions from you, and only from your employer , then it is a salary sacrifice scheme ( just one way of checking)

MIZZ12

masonic said:

MIZZ12 said:

So just to clarify, if my taxable income after my pension contributions lowers my income to basic rate tax threshold, that means I am eligible for the £1,000 PSA?

Provided your dividends and interest don't tip you over the higher rate threshold, then yes you'll be eligible for the higher PSA.

Thank you - and one more qn please which comes to mind!  Wondering if conversely,  if my taxable income during a tax year puts me in the basic rate threshold (even though I may have paid higher rate tax on my payslip at the beginning of the year and indeed in previous years), then for charitable donations made through Gift Aid, am I eligible to claim higher rate tax relief on those donations (and given that I was paying higher rate tax in the previous tax year)?  

Dazed_and_C0nfused

if my taxable income during a tax year puts me in the basic rate threshold (even though I may have paid higher rate tax on my payslip at the beginning of the year and indeed in previous years), then for charitable donations made through Gift Aid, am I eligible to claim higher rate tax relief on those donations (and given that I was paying higher rate tax in the previous tax year)?  

No.

Paying higher rate tax on a particular payslip doesn't make you higher rate taxpayer for the year as a whole so there is no higher rate tax relief due, for that tax year, on the Gift Aid.

If you were a higher rate taxpayer in previous tax years and made Gift Aid payments which you have not informed HMRC of in those tax years then you may well be due some higher rate tax relief for those tax years (you can go back 2916:17 at the moment).  But any higher rate tax relief due is limited to the higher rate tax paid in that tax year so if you were a few £ into the higher rate bracket don't expect much of a refund.

One scenario where it could be much more beneficial is if it made you eligible for Marriage Allowance (and your spouse could apply without it adversely affecting her by more than the tax benefit you would get).

masonic

MIZZ12 said:

masonic said:

MIZZ12 said:

So just to clarify, if my taxable income after my pension contributions lowers my income to basic rate tax threshold, that means I am eligible for the £1,000 PSA?

Provided your dividends and interest don't tip you over the higher rate threshold, then yes you'll be eligible for the higher PSA.

Thank you - and one more qn please which comes to mind!  Wondering if conversely,  if my taxable income during a tax year puts me in the basic rate threshold (even though I may have paid higher rate tax on my payslip at the beginning of the year and indeed in previous years), then for charitable donations made through Gift Aid, am I eligible to claim higher rate tax relief on those donations (and given that I was paying higher rate tax in the previous tax year)?  

As above. The higher rate tax you paid was only paid temporarily when your projected income for the year was above the higher rate threshold. It would have been refunded through reduced income tax in your more recent payslips.