Saving interest limit £500 or £1,000 before paying tax (due to AVC contributions)

Hello

My apologies if this has been asked before.

I know that as a higher rate (40%) tax payer I can earn £500 of savings interest without paying tax whereas a basic rate tax payer can earn £1,000 before paying tax. 

I am a higher rate tax payer but my pension contributions/deductions reduce my taxable earnings but I am still just in the 40% tax bracket.  I will also soon begin making AVC contributions and this will comfortably put me into the basic rate tax bracket.

Due to paying tax on my salary at the basic rate (and comfortably below the higher rate tax threshold due to the AVC contributions) does this mean I can earn more than £500 of savings interest, i.e. could I earn £1,000 in savings interest without paying tax?  

I'm not sure if I am now classed as a basic rate tax payer due to the AVC contributions.    

To add I'm not trying to avoid tax.  I am actually trying to save at the moment but I'm unsure when I will start paying tax on my savings interest.  I should add I don't have anywhere near £500 in savings interest but I'm planning ahead.   

Thank you in advance for your help.

Replies

  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    You start by looking at your tax liability ignoring the savings nil rate band (aka Personal Savings Allowance).  You include your taxable interest in this calculation.

    If you aren't a higher rate payer using that calculation then you will be able to have up to £1,000 of interest taxed at 0%.

    If you are deemed a higher rate taxpayer then you will get up to £500 taxed at 0%.
  • SarahB16SarahB16 Forumite
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    Thank you for your reply Dazed and Confused unfortunately I'm sorry but I don't really understand your response.  It's me as tax is definitely not one of my strong areas.  

    Perhaps if I could provide the following as an example would you be able to kindly let me know how much savings interest could be earnt before tax would be deducted please?  

    e.g. person A earns £60k per year (gross).  

    Person A's employer deducts their salary sacrifice pension contributions of £6k from their gross salary.

    The remaining salary annual salary is now £54k, i.e. above the threshold to pay higher rate (40%) tax.  However, person A pays AVC contributions of £12k (£1k per month) from their gross salary. 

    After the AVC contributions the remaining salary is now £42k, i.e. below the threshold to pay higher rate tax. 

    Person A has some savings which currently provide £400 per annum of interest (gross) but is unsure when they will start having tax deducted from their savings interest.  

    Sorry that this reads like a maths question and thank you (or anyone else) who could help me with my query.  

  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    Do you mean your P60 will show you earned £42,000?
  • SarahB16SarahB16 Forumite
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    The example is very near to my circumstances but not exactly. 

    I have only just begun making AVC contributions (first deductions will be taken mid-November 2022) so do not know what my P60 will show however I do know that the deductions due to AVC contributions will save me tax but will not save me NI.  

    It was made clear to me it was not a salary sacrifice scheme.   

  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    SarahB16 said:
    The example is very near to my circumstances but not exactly. 

    I have only just begun making AVC contributions (first deductions will be taken mid-November 2022) so do not know what my P60 will show however I do know that the deductions due to AVC contributions will save me tax but will not save me NI.  

    It was made clear to me it was not a salary sacrifice scheme.   

    Well if the AVC's are being paid as net pay contributions you would have taxable income of £42,000 but that clearly can't apply this tax year if you haven't even started making the AVC contributions.

    Which tax year are you referring to 2023:23 or 2023:24?
  • SarahB16SarahB16 Forumite
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    I don't need to worry this tax year year as I was unwell/required surgery this year and needed to take a considerable amount of time off work and my salary was reduced accordingly (reduced to half pay). 

    I'm thinking ahead to the 2023/24 tax year as I'm planning ahead and wish to know how much savings interest I can earn before needing to pay tax on the savings interest.  

    Yes that's right my first AVC's begin in November 2022.  

    I do appreciate your help, thank you. 
  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    You will be nowhere near being a higher rate payer in 2023:24 when you pay the AVC's for a full tax year.

    Unless you omitted to mention something relevant like other taxable income (company benefits, pension, rental income etc etc) then you are about £8k short of paying higher rate tax.

    So unless your interest reaches £8k+ you will be deemed a basic rate payer and the first £1,000 of interest will be taxed at 0%.
  • SarahB16SarahB16 Forumite
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    You will be nowhere near being a higher rate payer in 2023:24 when you pay the AVC's for a full tax year.

    Unless you omitted to mention something relevant like other taxable income (company benefits, pension, rental income etc etc) then you are about £8k short of paying higher rate tax.

    So unless your interest reaches £8k+ you will be deemed a basic rate payer and the first £1,000 of interest will be taxed at 0%.


    Thank you that is extremely helpful.  I genuinely didn't know how the AVC's would be treated and then the impact this would have re tax on my savings interest.  

    Nothing omitted and my savings interest may just exceed £500 which is why I was wondering.  

    Thank you again.  Very much appreciated.   

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