When allowance is not allowance.

talexuser

I have a spreadsheet for tax and this year have tried to keep savings interest below £500 because a higher rate taxpayer thinking this would save money. Surprisingly when I doubled the savings interest in the calculation, even though still below £500 the total tax bill went up significantly. 

This surprised me since did not seem common sense if the savings interest was supposed to be taxed at 0%.

The answer after a bit of thought was because savings is added to your total income before dividends. Therefore if you have dividends above the "dividend allowance" threshold and pay tax on them, increased savings interest, even if they are below the 0% savings band pushes more dividends into tax and you still end up paying more tax.

The term "allowance" which many use for these 0% bands seems incorrect in a way that fools you into thinking they are tax free, when depending on many different circumstances you can still pay increased tax, even within a 0% savings band because of the way total income is treated.

AmityNeon

Yes, the nil rate bands form part of taxable income and are not strictly allowances like the Personal Allowance. This can have a material impact when income straddles band thresholds.

talexuser said:

I have a spreadsheet for tax and this year have tried to keep savings interest below £500 because a higher rate taxpayer thinking this would save money. Surprisingly when I doubled the savings interest in the calculation, even though still below £500 the total tax bill went up significantly.

Example figures?

Dazed_and_C0nfused

talexuser said:

I have a spreadsheet for tax and this year have tried to keep savings interest below £500 because a higher rate taxpayer thinking this would save money. Surprisingly when I doubled the savings interest in the calculation, even though still below £500 the total tax bill went up significantly. 

This surprised me since did not seem common sense if the savings interest was supposed to be taxed at 0%.

The answer after a bit of thought was because savings is added to your total income before dividends. Therefore if you have dividends above the "dividend allowance" threshold and pay tax on them, increased savings interest, even if they are below the 0% savings band pushes more dividends into tax and you still end up paying more tax.

The term "allowance" which many use for these 0% bands seems incorrect in a way that fools you into thinking they are tax free, when depending on many different circumstances you can still pay increased tax, even within a 0% savings band because of the way total income is treated.

Correct.

It can also mean an increased High Income Child Benefit Charge or a reduction in the Personal Allowance.

And with dividends it can result in the loss of Marriage Allowance.  In extreme circumstances £1 of dividend income taxed at 0% within the higher rate band could add £252 to your liability 😳

bd10

I start with calculating my adjusted net income to determine whether I have any savings allowance or not. If not I hold gilts instead.

talexuser

AmityNeon said:

Yes, the nil rate bands form part of taxable income and are not strictly allowances like the Personal Allowance. This can have a material impact when income straddles band thresholds.

Example figures?

The difference was £62 in tax.