UCPLS and savings starting rate £5000

Jacklob

Very quick question, as although I have looked on the gov website, I,m still not completely sure of this topic.  If I have no earnings then start to take a series of lump sums from my SIPP when i attain the age of 55 in 2 years time, does the 25% tax free lump sum affect the savings starting rate of £5000. I am planning to take out £16760 , after 25% tax free cash then remainder will be my personal allowance of £12570, which will be also tax free.  On the gov website it states “for every £1 of other income above your personal allowance, it reduces the starting rate by £1.  So does the tax free lump sum of £4190 class as “other income”, although it is tax free.  Thank you in advance.

molerat

The tax free sum is ignored, it is not income for any taxation purpose.

Dazed_and_C0nfused

The £12,570 isn't "tax free".

It's taxable income which, unless you have applied for Marriage Allowance, doesn't incur any tax liability because of the Personal Allowance.

In a similar way that (non ISA) interest is taxable even if actually taxed at one of the 0% rates.

You have to use the Personal Allowance and any available savings starter rate band before you can use the savings nil rate band (aka Personal Savings Allowance).

Jacklob

Thank you, but can you just explain the last paragraph, i.e. “you have to use any available SAVINGS STARTER RATE band before you can use the SAVINGS NIL RATE  band (aka personal savings allowance.  Are these two different things, I thought it was just called “the starting rate of £5000) Can you show the workings of how my £16760 pension lump sum and £5000 savings interest falls within each band. Thank you

Jacklob

Sorry, I m still confused, I thought the £4190 25% tax free lump sum from the pension was taken out of the equation, if so I would then not pay tax on the whole £16700 or the £5000 and looking at your reply I would then have an additional £1000 (PSA) allowance to use.  In your first post you stated that “the tax free lump sum is ignored, it is not income for any taxation purposes”.  I,m obviously not understanding this correctly.  It appears very complex.  

molerat

Sorry, assumed the £16760 was the taxable amount.

You use the allowances in the order £12570 PA, £5000 SSR then £1000 PSA.  Your pension income is £12570 so you have the full £5000 SSR to use up then the £1000 PSA.

Secret2ndAccount

Forget about the 25% tax free. It's tax free, not taxable, not counted, not taxed, outside the calculation.

Now on to the 12570. That uses up your Personal Allowance. So zero tax to pay there. If you 'earn' any more (pension, salary, rental income) then you start to pay 20% tax.

However, you can also receive up to 6000 in interest from your savings, and not pay any tax on it. Any more than 6000 and the savings get added to your earnings, so with your personal allowance already used up, you would pay tax at 20%.

If you chose to take more out of your pension, this could cost you two ways. First you pay tax on anything over 12570; second, it eats into your Starting Rate for Savings, which could make more of your interest taxable too. On the other hand, if you had more than 6000 in interest, you could take less than 12570 in earnings, and still keep the tax bill at zero - keep the total at 18570.

The distinction between the 5000 Starting Rate for Savings, and the 1000 Personal Savings Allowance only comes into play for people who are earning a bit more than this example. If your salary/pension was 20,000 then your SRS would be gone, but you would still get the 1000 PSA. PSA only starts to go away if you reach higher rate tax.

Jacklob

Thats fantastic, I think I,ve got it now, thank you for all the replies