Tax - close to bands

Tom_Hendo

Hi

Hoping someone can help. I understand basic rate tax payers get £1000 allowance before paying tax, and higher rate get £500. Also the higher rate is £50,270 for moving to 40% bracket. 

So hypethetically if you earnt £50k exactly and earnt £1k interest on standard savings, what do you pay tax on? Trying to work out if it treats the first £270 in one banding and the next £730 in the next.

Thanks

RobM99

https://www.gov.uk/apply-tax-free-interest-on-savings

TheMightySwordfish

You are correct. £270 @ 20%, £730 @ 40%

You get round this by using your ISA allowance and then Premium Bonds. £20k per year plus £50k total in PB's

eskbanker

Tom_Hendo said:

Hoping someone can help. I understand basic rate tax payers get £1000 allowance before paying tax, and higher rate get £500. Also the higher rate is £50,270 for moving to 40% bracket. 

So hypethetically if you earnt £50k exactly and earnt £1k interest on standard savings, what do you pay tax on? Trying to work out if it treats the first £270 in one banding and the next £730 in the next.

In this situation, your total taxable income (assuming nothing else and that you're not in Scotland, no marriage allowance, Ts & Cs apply, etc) is £51K and therefore you have a nil-rate band (not an allowance as such) for savings of £500.  The remaining £50.5K of income would be taxed at 20% on £50,270 (or rather £37,700), and 40% on £230.

george4064

Don’t forget any dedications that reduce your taxable income such as pension salary sacrifice payments.

Tom_Hendo

eskbanker said:

Tom_Hendo said:

Hoping someone can help. I understand basic rate tax payers get £1000 allowance before paying tax, and higher rate get £500. Also the higher rate is £50,270 for moving to 40% bracket. 

So hypethetically if you earnt £50k exactly and earnt £1k interest on standard savings, what do you pay tax on? Trying to work out if it treats the first £270 in one banding and the next £730 in the next.

In this situation, your total taxable income (assuming nothing else and that you're not in Scotland, no marriage allowance, Ts & Cs apply, etc) is £51K and therefore you have a nil-rate band (not an allowance as such) for savings of £500.  The remaining £50.5K of income would be taxed at 20% on £50,270 (or rather £37,700), and 40% on £230.

Really helpful, makes full sense thanks. 

Tom_Hendo

george4064 said:

Don’t forget any dedications that reduce your taxable income such as pension salary sacrifice payments.

Yeah got this in my good ol' spreadsheet ready just simplified for this post. I'm not near needing to worry about it just yet, but like to have positive thinking for 2023!

AmityNeon

£51,000 taxable income results in paying Higher rate tax.

£50,000 earnings:

• less £12,570 (standard Personal Allowance) = £37,430
• taxed at 20% = £7,486
• £50,270 - £50,000 earnings = £270 remaining in the Basic rate band

£1,000 savings income:

• the first £500 is taxed at 0%:
  • £270 is in the Basic rate band; £230 is in the Higher Rate band
• the remaining £500 sits entirely in the Higher Rate band and is taxed at 40% = £200

Dazed_and_C0nfused

TheMightySwordfish said:

You are correct. £270 @ 20%, £730 @ 40%

You get round this by using your ISA allowance and then Premium Bonds. £20k per year plus £50k total in PB's

You have forgotten that the first £500 is going to be taxed at 0%

AmityNeon

eskbanker said:

Tom_Hendo said:

Hoping someone can help. I understand basic rate tax payers get £1000 allowance before paying tax, and higher rate get £500. Also the higher rate is £50,270 for moving to 40% bracket. 

So hypethetically if you earnt £50k exactly and earnt £1k interest on standard savings, what do you pay tax on? Trying to work out if it treats the first £270 in one banding and the next £730 in the next.

In this situation, your total taxable income (assuming nothing else and that you're not in Scotland, no marriage allowance, Ts & Cs apply, etc) is £51K and therefore you have a nil-rate band (not an allowance as such) for savings of £500.  The remaining £50.5K of income would be taxed at 20% on £50,270 (or rather £37,700), and 40% on £230.

Allocating £270 of the Personal Allowance towards savings income so the full £37,700 Basic rate band is utilised would be more tax efficient, but I'm not sure whether HMRC automatically allocates the Personal Allowance in a manner that maximises savings for the taxpayer.

EthicsGradient

AmityNeon said:

eskbanker said:

Tom_Hendo said:

Hoping someone can help. I understand basic rate tax payers get £1000 allowance before paying tax, and higher rate get £500. Also the higher rate is £50,270 for moving to 40% bracket. 

So hypethetically if you earnt £50k exactly and earnt £1k interest on standard savings, what do you pay tax on? Trying to work out if it treats the first £270 in one banding and the next £730 in the next.

In this situation, your total taxable income (assuming nothing else and that you're not in Scotland, no marriage allowance, Ts & Cs apply, etc) is £51K and therefore you have a nil-rate band (not an allowance as such) for savings of £500.  The remaining £50.5K of income would be taxed at 20% on £50,270 (or rather £37,700), and 40% on £230.

Allocating £270 of the Personal Allowance towards savings income so the full £37,700 Basic rate band is utilised would be more tax efficient, but I'm not sure whether HMRC automatically allocates the Personal Allowance in a manner that maximises savings for the taxpayer.

Yes, they do use allowances in the order that benefits the taxpayer. But it's also the "normal" way they express it - look at earned/pension income first, then savings interest.