Savings and Tax

adamsteventon

Hello there. With two more monthly pays to come from work I will be very close to going into the higher tax bracket. My wages are my only income, apart from some bank interest which is going to amount to nearly £850. I think I can earn £1000 tax free on bank interest received if I remain in the basic tax bracket, but I believe this lowers to £500 if I enter the higher tax bracket. My question is if I do go into the higher tax bracket, even by one pound, does that mean I would have to pay tax on the £350 interest above the £500 interest allowance? And if I do, then do HMRC work out the tax I owe or do I have to self assess it? Hope that all makes sense and thank you in advance for your responses.

eskbanker

Yes, even nudging into the higher rate band by £1 would reduce your personal savings allowance from £1,000 to £500, although note that the savings interest itself is also taxable income, even though it's taxed at 0%, so your £850 also counts towards the evaluation of whether you fall into the higher rate band, even if PAYE income doesn't get you there.

Perhaps worth investigating the possibilities for reducing your taxable income, e.g. pension contributions, transfer of allowances between spouses, etc?

https://forums.moneysavingexpert.com/categories/cutting-tax

adamsteventon

Thanks very much for your kind reply. I think I'm destined to go into the higher bracket then as your possible ways out of it don't really apply to my situation. Do you know if I'll have to declare the interest through self assess or will the banks inform HMRC and they'll work it out?

ColdIron

A pension contribution could keep you below of the higher rate threshold and you would receive tax relief as well. As they say, simples

eskbanker

There's no need to self-assess just for this - the banks will update HMRC, who will adjust your PAYE tax coding notice accordingly and/or send you a bill.  Based on threads on here, it's unlikely they'll get it right first time though!

As a follow-on from your original post, earning £850 in interest in the current environment would suggest a significant sum held in cash deposit accounts (unless you're making use of certain fixed-interest investments) - do you need to retain so much in that form, where it's likely to lose real-terms value to inflation?  Are you using your annual ISA allowances?

MX5huggy

Pension contributions not applicable? 

It’s true if you’ve got a pension worth over £1073100. Or you’ve already paid in £120000 to pension this tax year. 

Otherwise Join Vanguard open a SIPP and deposit £2000. Choose a random fund something with world or life in its name and bask in your tax efficiency. 

Albermarle

Otherwise Join Vanguard open a SIPP and deposit £2000. Choose a random fund something with world or life in its name and bask in your tax efficiency.

Or even easier , the OP could just increase their contributions to their workplace pension , just enough to stop being a higher rate taxpayer.

OP - Higher rate tax relief on pension contributions is the gift that just keeps giving , so you should do the above anyway , regardless of the issue of savings interest . If higher contributions leaves things a bit tight then just use up a bit of your savings to top up your take home pay .

£1000 in savings will earn approx £10 a year.

£1000 in your pension will immediately gain 40% due to the tax relief , so even if the pension investments go down a bit you are still well ahead . If they grow then even better,

MX5huggy

Albermarle said:

Otherwise Join Vanguard open a SIPP and deposit £2000. Choose a random fund something with world or life in its name and bask in your tax efficiency.

Or even easier , the OP could just increase their contributions to their workplace pension , just enough to stop being a higher rate taxpayer.

I know little of private sector work place pension administration, but just increasing work place pension contributions is not easy for one off lump sums in public sector pensions. Vanguard being a good catch all for all circumstances if you quickly want lose a couple of grand. 

EthicsGradient

adamsteventon said:

Thanks very much for your kind reply. I think I'm destined to go into the higher bracket then as your possible ways out of it don't really apply to my situation. Do you know if I'll have to declare the interest through self assess or will the banks inform HMRC and they'll work it out?

Does that mean you've already paid as much pension contributions as you can afford, or you can't alter contributions before the end of the tax year, and you have also taken into account whatever contributions you've already made this year in working out the size of the standard tax band before you're liable to the higher rate?

adamsteventon

Thanks for your replies, very much appreciated. I have a public service pension and I'm pretty sure I can't make any additional contributions to it. Similarly my annual salary is fixed and I believe my pension contributions are a defined percentage of that. I'm very risk averse with my savings, they're all (approximately £85,000) in fixed rate savings accounts as opposed to investments. I've used £15,000 of my annual ISA allowance so far this year. Sorry, I don't really know what a SIPP is....🙄

soulsaver

adamsteventon said:

Thanks for your replies, very much appreciated. I have a public service pension and I'm pretty sure I can't make any additional contributions to it. Similarly my annual salary is fixed and I believe my pension contributions are a defined percentage of that. I'm very risk averse with my savings, they're all (approximately £85,000) in fixed rate savings accounts as opposed to investments. I've used £15,000 of my annual ISA allowance so far this year. Sorry, I don't really know what a SIPP is....🙄

I could google it for you...