2880 to 3600 and Tax on Savings Interest

ev51

I've kept up the 2880 to 3600 to benefit by around £180pa (BR taxpayer).  However the £2700 drawdown is eating in to the starting rate limit, just leaving a few hundred plus the £1000 PSA.  With improving interest on savings it looks like I'll have to pay some tax on interest this year (possibly more than £180).  Has anyone previously calculated the taxable income "sweet spot" to still benefit from the £180 as its not quite as simple as keeping it under £18,570?  At what point is it better to just "drawdown" the 2880 allocated for my SIPP (Cash)?

Secret2ndAccount

Are you saying that your other income already makes you a basic rate taxpayer, before you withdraw from the SIPP? If so, then the game is up for you I'm afraid. Every £1 you draw in taxable income from the SIPP renders another £1 of interest taxable. So your SIPP withdrawals are being taxed at 35%!
If your income is below 12570 (or your personal tax threshold) then you could draw just enough taxable from the SIPP to take you up to your threshold. Everything after that is costing you money.
I do see a couple of ISA's that are starting to pay a decent rate of interest. Not market-leading, but better than the after-tax market leaders if you are an interest tax-payer.

My head is concocting some games you could play if you are earning about 14k. Don't take any SIPP income in year 1, so you can get your interest without tax. Then take 2 years' income from the SIPP in year 2. That year your interest is taxable, but, once your income is over 17570, further income from the SIPP isn't costing you any more. Even though I'm talking about 2 years, you could pay in on April 3rd and April 7th, then withdraw in May, so the whole thing could be sorted in a couple of months without having any dead money hanging around. Whether this is worth the trouble for the tax you save is another question.

ev51

Yes, DC pension income takes me over personal allowance and an RPI increase this year plus drawdown and increased savings interest has caught me out.  I gave up on ISA's years ago but just last week opened one and will swap over savings each year up to the limit. Next tax year I can stop or reduce drawdown and just spend the SIPP contribution instead to reduce my tax liability.  Thanks for your suggestions.

NedS

How much interest income do you have each year? Do you have any dividend income, if not you may be able to take advantage of that allowance by moving savings into investments that pay a dividend (not without risk). There is a £2000 annual dividend allowance, and once exceeded, a basic rate tax payer only pays 8.75% tax on dividends so this may be an option if you have fully utilised your ISA allowance.

Audaxer

ev51 said:

Yes, DC pension income takes me over personal allowance and an RPI increase this year plus drawdown and increased savings interest has caught me out.  I gave up on ISA's years ago but just last week opened one and will swap over savings each year up to the limit. Next tax year I can stop or reduce drawdown and just spend the SIPP contribution instead to reduce my tax liability.  Thanks for your suggestions.

If you are drawing income from selling investments in your DC pension, could you not open an S&S ISA and transfer a similar sum (up to the £20k annual limit) from your savings into the same (or similar) investments within the S&S ISA? Although it would be similar to just taking income from your savings, it would still be using your personal tax allowance.

ev51

NedS said:

How much interest income do you have each year? Do you have any dividend income, if not you may be able to take advantage of that allowance by moving savings into investments that pay a dividend (not without risk). There is a £2000 annual dividend allowance, and once exceeded, a basic rate tax payer only pays 8.75% tax on dividends so this may be an option if you have fully utilised your ISA allowance.

Would have been around £2.8k - 3k, reduced by a few hundred now thanks to the ISA.  No dividend income at the moment but an option I will bear in mind.

Audaxer said:

ev51 said:

Yes, DC pension income takes me over personal allowance and an RPI increase this year plus drawdown and increased savings interest has caught me out.  I gave up on ISA's years ago but just last week opened one and will swap over savings each year up to the limit. Next tax year I can stop or reduce drawdown and just spend the SIPP contribution instead to reduce my tax liability.  Thanks for your suggestions.

If you are drawing income from selling investments in your DC pension, could you not open an S&S ISA and transfer a similar sum (up to the £20k annual limit) from your savings into the same (or similar) investments within the S&S ISA? Although it would be similar to just taking income from your savings, it would still be using your personal tax allowance.

My drawdown SIPP is held as cash, I wondered if by moving some of the SIPP to dividend investments I would benefit from the dividend allowance but would it just be paid back into the cash part of the SIPP (not outwith) and end up being taxed when drawn down?  I do have another crystallised DC (invested) which I can't drawdown without making the tax liability worse, luckily I don't need the income at the moment!

NedS

ev51 said:

Audaxer said:

ev51 said:

Yes, DC pension income takes me over personal allowance and an RPI increase this year plus drawdown and increased savings interest has caught me out.  I gave up on ISA's years ago but just last week opened one and will swap over savings each year up to the limit. Next tax year I can stop or reduce drawdown and just spend the SIPP contribution instead to reduce my tax liability.  Thanks for your suggestions.

If you are drawing income from selling investments in your DC pension, could you not open an S&S ISA and transfer a similar sum (up to the £20k annual limit) from your savings into the same (or similar) investments within the S&S ISA? Although it would be similar to just taking income from your savings, it would still be using your personal tax allowance.

My drawdown SIPP is held as cash, I wondered if by moving some of the SIPP to dividend investments I would benefit from the dividend allowance but would it just be paid back into the cash part of the SIPP (not outwith) and end up being taxed when drawn down?  I do have another crystallised DC (invested) which I can't drawdown without making the tax liability worse, luckily I don't need the income at the moment!

Correct, anything within the SIPP is exempt from tax whilst within the SIPP, so you pay no CGT, dividend tax etc. However, when you withdraw from the SIPP it is liable to income tax at your marginal rate regardless of where that income originated (capital gains, dividends etc).

Dividend tax only applies to dividends that are paid on investments held outside of a tax wrapper, so if for example you have £100k of investments held outside of a SIPP/ISA, you could place them in a global equity tracker paying around 1.5-2% dividend and receive that dividend within your dividend allowance, and maybe keep any capital gains within your CGT allowance. It's normally better to get any investments into an ISA if you can, but there are other allowances (CGT and dividend) that you can use if you can't.