Still Unsure about PSA. 8 December 2022 at 11:15AM in Savings & investments 4 replies 221 views

threlkeld53

Wanting to clarify what is the limit I can earn from interest in fixed term accounts befoe paying tax.....

I'm retired with a personal tax-free allowance of £13,827 which also comprises of the marriage tax allowance.
From April 2023 my state pension will be around £10,600
Each year I pay into a SIPP £2,880 and when that is topped up to £3,600 I withdraw the tax-free element and then the balance of £2,700.
I then withdraw approx £530 from the SIPP in order to use up the remainder of my personal tax allowance.

I have approx £125k in 12 month fixed term accounts maturing soon. Continuing with these for a further year or two will earn at this moment in time about 4% or more p.a.
or in other words at least £5k in interest.

Am I correct in saying that no tax on that interest would be liable? What would be the limit where one would not pay tax on interest in this scenario? 

molerat

Your income for the year is £10600 + £2700 + £530 = £13830.  You have a tax free / 0% allowance including savings allowances of £12570 + £1000 + £5000 = £18570.  £18570 - £13830 = £4740 interest before tax.  Tax will be due on the pension income above your £12570 personal allowance but that is offset by the £252 tax reduction afforded by the marriage allowance.  So if you want to pay no tax you can reduce the second small pension take to £270.

Dazed_and_C0nfused

threlkeld53 said:

Wanting to clarify what is the limit I can earn from interest in fixed term accounts befoe paying tax.....

I'm retired with a personal tax-free allowance of £13,827 which also comprises of the marriage tax allowance.
From April 2023 my state pension will be around £10,600
Each year I pay into a SIPP £2,880 and when that is topped up to £3,600 I withdraw the tax-free element and then the balance of £2,700.
I then withdraw approx £530 from the SIPP in order to use up the remainder of my personal tax allowance.

I have approx £125k in 12 month fixed term accounts maturing soon. Continuing with these for a further year or two will earn at this moment in time about 4% or more p.a.
or in other words at least £5k in interest.

Am I correct in saying that no tax on that interest would be liable? What would be the limit where one would not pay tax on interest in this scenario? 

You cannot have a Personal Allowance greater than £12,570.

For the recipient Marriage Allowance is a tax reducer, not an extra allowance.

Based on what you have said you will use £1,260 of the basic rate band so this reduces the savings starter rate band (0% tax rate) from £5,000 to £3,740.

Once you have used that you can use the £1,000 savings nil rate band (also 0%).

So once you hit £4,741 in interest you will be paying tax on it.

AmityNeon

The Marriage Allowance doesn't increase your Personal Allowance, so you should be aware of how this affects your tax liability. At the moment, the tax you pay on £1,260 income (above £12,570) is fully offset by the £252 tax credit, but this income is also reducing your starting rate for savings. As @molerat suggested, you could reduce your taxable income to £13,570, which would allow £5,000 in interest to benefit from 0% tax:

• £13,570 - £12,570 = £1,000
• Starting rate for savings = £5,000 - £1,000 = £4,000
• Add the Personal Savings Allowance (£1,000) = £5,000

£1,000 of pension income would be taxable at 20%, but this £200 is offset by the £252 tax credit, leaving £52 of surplus credit unused.

At this point, every additional £1 of taxable pension income would effectively be double taxed. You would pay 20% on pension income above your Personal Allowance as usual and 20% on savings income above the Personal Savings Allowance, due to the additional pension income further reducing your starting rate for savings. With the surplus tax credit amounting to £52, this would cover an additional £130 of taxable pension income.

eskbanker

threlkeld53 said:

I have approx £125k in 12 month fixed term accounts maturing soon. Continuing with these for a further year or two will earn at this moment in time about 4% or more p.a.
or in other words at least £5k in interest.

Am I correct in saying that no tax on that interest would be liable? What would be the limit where one would not pay tax on interest in this scenario? 

You've perhaps already factored this into your planning but just to check, are you using your ISA allowance?