Starting savings £5000 allowance + PSA

COLIN_in_NOTTS

I am unsure how to calculate this. I thought, with the combined earnings allowance now at £18,570, you could earn up to £6000 of savings interest tax free. So when would I need to make a declaration?

I contacted HMRC, (2 years ago), to advise of savings interest of around £2000 and asked what I needed to do. They seemed to ignore any "Starting to Save" allowance and instantly lowered my personal tax allowance so as to gain tax on my savings interest. When I challenged this, due to my pension earnings already being far less than my tax threshold, their response was, "well that's what we do". - At the time I would only gross about £11,000 and didn't need to pay any tax anyway. But now savings interest rates have increased, I am beginning to wonder where I stand.

Dazed_and_C0nfused

COLIN_in_NOTTS said:

I am unsure how to calculate this. I thought, with the combined earnings allowance now at £18,570, you could earn up to £6000 of savings interest tax free. So when would I need to make a declaration?

I contacted HMRC, (2 years ago), to advise of savings interest of around £2000 and asked what I needed to do. They seemed to ignore any "Starting to Save" allowance and instantly lowered my personal tax allowance so as to gain tax on my savings interest. When I challenged this, due to my pension earnings already being far less than my tax threshold, their response was, "well that's what we do". - At the time I would only gross about £11,000 and didn't need to pay any tax anyway. But now savings interest rates have increased, I am beginning to wonder where I stand.

I presume you mean reduce your tax code allowances?

Only those with adjusted net income in excess of £100k have a lower Personal Allowance.

Are you saying that this actually made you pay tax?

Interest uses up any spare Personal Allowance first.  Then any savings starter rate band and only after that can you use the savings nil rate band (aka Personal Savings Allowance).

You only need to notify HMRC if your interest is £10,000 or more.

COLIN_in_NOTTS

Thanks for your response.

Yes, they lowered my tax code from the original basic level, but as I still didn't go over that, no tax was paid.

As I am now getting over £4,000 in savings interest, it will take my earnings over my personal tax allowance which is currently 1211L. Do I just assume no tax is due, or do I need to inform HMRC

Dazed_and_C0nfused

Your tax code allowances should only be reduced to the point that any spare allowances are used by the interest.

So if your earnings are say £9,800 then your tax code shouldn't be reduced to less than 980L.

If your only income is the earnings and some interest it would only be less than 980L if you had to pay tax on the interest i.e. you were getting more than £8,770 in interest in this example.

Spare Personal Allowance £2,770
Savings starter rate band £5,000
Savings nil rate band £1,000

COLIN_in_NOTTS

That is how I understood the rules, but I was totally confused by their need to lower my tax allowance in the first instance.

In my mind, they wouldn't have needed to reduce my allowance unless my interest and pensions earnings combined were over £18,570. Actually, even now, they will still only total around £13,500.

In which case, (as I see it);

I still won't need to make a declaration. - And probably should ask why my code is 1211L and not 1257L.

eskbanker

COLIN_in_NOTTS said:

And probably should ask why my code is 1211L and not 1257L.

Putting aside how illogical this practice appears to be, it's worth bearing in mind that the purpose of tax coding is solely to drive PAYE deductions, rather than to (re)set your actual allowances as such, so there isn't an issue unless your non-savings income exceeds £12,110.

Dazed_and_C0nfused

COLIN_in_NOTTS said:

That is how I understood the rules, but I was totally confused by their need to lower my tax allowance in the first instance.

In my mind, they wouldn't have needed to reduce my allowance unless my interest and pensions earnings combined were over £18,570. Actually, even now, they will still only total around £13,500.

In which case, (as I see it);

I still won't need to make a declaration. - And probably should ask why my code is 1211L and not 1257L.

Your tax code is probably 1211L for one of two reasons,

Your interest in 2021:22 was ~£460
Or

Your interest in 2021:22 was > £460 but your earnings/pension income was in the region of £12,110 - £12,119 so the interest had just used your spare Personal Allowance.

Whether or not it's the best system is open to debate but as things stand the facts are that you have spare Personal Allowance and the interest uses the spare Personal Allowance before the savings starter rate band is used.

And the savings starter rate band must be used before the savings nil rate band can be used.