Is savings interest included in calculating your tax band?

abitpedantic

I’m looking for further clarification on the “corner” issue.

If I have £49970 income and £700 untaxed savings interest, how much tax do I owe on the latter? I can see arguments for either £40 (£200 @ 20%) or £80 (£200 @ 40%).

Similarly, if I received £2200 of dividends (and no savings interest) in the current FY would the tax owed be £17.50 (£200 @ 8.75%) or £67.50 (£200 @ 33.75%)?

jaypers

Just to add to this, if your income was £50,269 (20% tax band), would anything over £2 in interest mean that you only get £500 in tax free interest p/a instead of £1000?

35har1old

poppystar said:

I’m just trying to clarify how savings interest works with relation to tax bands. I understand that as a basic rate payer then there is a £1k allowance on the savings interest and a £500 allowance for the next higher banding. 

So eg if earnings are say £35k and total savings interest is £10k then the income after annual allowance and £9k of the savings interest are both taxed at basic rate. No problem.

What would then happen if income remained the same but savings interest doubled to £20k - does this mean that you become a higher rate tax payer because of the interest taking total money in to over the higher rate threshold and the tax free savings allowance reduces to £500? Or is savings interest income still kept separate and you stay treated as basic rate because that is the band earnings are in? 

Also, just to complicate it what happens if there is also tax free interest from ISAs? I can see it itself remains tax free but is it added to earnings and other savings interest to give total income and the banding done on that? 

Hope that’s clear. Thanks. 

Visit Gov UK website Read 

If you go over your allowance

Once you exceed your savings allowance you are taxed at your standard rate. So if you are paying the basic rate you will pay 20%

jimjames

jaypers said:

Just to add to this, if your income was £50,269 (20% tax band), would anything over £2 in interest mean that you only get £500 in tax free interest p/a instead of £1000?

Yes it would. So definite benefit in using an ISA if your interest is over £500 in that situation.

35har1old

jaypers said:

Just to add to this, if your income was £50,269 (20% tax band), would anything over £2 in interest mean that you only get £500 in tax free interest p/a instead of £1000?

Visit Gov UK website  type 

Tax on savings interest

Dazed_and_C0nfused

jimjames said:

jaypers said:

Just to add to this, if your income was £50,269 (20% tax band), would anything over £2 in interest mean that you only get £500 in tax free interest p/a instead of £1000?

Yes it would. So definite benefit in using an ISA if your interest is over £500 in that situation.

Or increasing your basic rate band.

EthicsGradient

abitpedantic said:

I’m looking for further clarification on the “corner” issue.

If I have £49970 income and £700 untaxed savings interest, how much tax do I owe on the latter? I can see arguments for either £40 (£200 @ 20%) or £80 (£200 @ 40%).

Similarly, if I received £2200 of dividends (and no savings interest) in the current FY would the tax owed be £17.50 (£200 @ 8.75%) or £67.50 (£200 @ 33.75%)?

(a) £40. The total is over £50,270, so the PSA is £500, leaving the £200. But you pay 20% on (49970-12570)=£37,400 on the earned income, leaving £300 in your basic rate, so you pay 20% on all the savings interest.

(b) Similarly in this year, yes, £17.50, with the same reasoning.

What I called the "corner" applies to people whose total income would have been up to £50,270, but an increase in savings income from at least £500 is what takes them over that. Eg earned income £49,570, savings income £700: no tax paid on savings interest (it's all inside the £1,000 PSA). Savings income £701: now your PSA is only £500, so you pay £40 on the other £200, despite having got only £1 more in interest.

Dazed_and_C0nfused

EthicsGradient said:

abitpedantic said:

I’m looking for further clarification on the “corner” issue.

If I have £49970 income and £700 untaxed savings interest, how much tax do I owe on the latter? I can see arguments for either £40 (£200 @ 20%) or £80 (£200 @ 40%).

Similarly, if I received £2200 of dividends (and no savings interest) in the current FY would the tax owed be £17.50 (£200 @ 8.75%) or £67.50 (£200 @ 33.75%)?

(a) £40. The total is over £50,270, so the PSA is £500, leaving the £200. But you pay 20% on (49970-12570)=£37,400 on the earned income, leaving £300 in your basic rate, so you pay 20% on all the savings interest.

(b) Similarly in this year, yes, £17.50, with the same reasoning.

What I called the "corner" applies to people whose total income would have been up to £50,270, but an increase in savings income from at least £500 is what takes them over that. Eg earned income £49,570, savings income £700: no tax paid on savings interest (it's all inside the £1,000 PSA). Savings income £701: now your PSA is only £500, so you pay £40 on the other £200, despite having got only £1 more in interest.

That doesn't look right to me.

The earnings/pension of £49,970 would use all of the Personal Allowance and £37,400 of the basic rate band.

The first £300 of interest would be taxed at the savings nil rate of 0% but this uses all the remaining basic rate band.

The next £200 of interest uses the rest of the savings nil rate (0%), but is within the higher rate band.  

And the final £200 of interest is taxed at 40% so the tax due would be £80.

EthicsGradient

Dazed_and_C0nfused said:

EthicsGradient said:

abitpedantic said:

I’m looking for further clarification on the “corner” issue.

If I have £49970 income and £700 untaxed savings interest, how much tax do I owe on the latter? I can see arguments for either £40 (£200 @ 20%) or £80 (£200 @ 40%).

Similarly, if I received £2200 of dividends (and no savings interest) in the current FY would the tax owed be £17.50 (£200 @ 8.75%) or £67.50 (£200 @ 33.75%)?

(a) £40. The total is over £50,270, so the PSA is £500, leaving the £200. But you pay 20% on (49970-12570)=£37,400 on the earned income, leaving £300 in your basic rate, so you pay 20% on all the savings interest.

(b) Similarly in this year, yes, £17.50, with the same reasoning.

What I called the "corner" applies to people whose total income would have been up to £50,270, but an increase in savings income from at least £500 is what takes them over that. Eg earned income £49,570, savings income £700: no tax paid on savings interest (it's all inside the £1,000 PSA). Savings income £701: now your PSA is only £500, so you pay £40 on the other £200, despite having got only £1 more in interest.

That doesn't look right to me.

The earnings/pension of £49,970 would use all of the Personal Allowance and £37,400 of the basic rate band.

The first £300 of interest would be taxed at the savings nil rate of 0% but this uses all the remaining basic rate band.

The next £200 of interest uses the rest of the savings nil rate (0%), but is within the higher rate band.  

And the final £200 of interest is taxed at 40% so the tax due would be £80.

Ah, I see you're right, and I'm wrong - I thought the PSA was used in addition to other bands, but it's "laid on top of them". See eg https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/savings-and-tax#example-magda-how-income-within-the-personal-savings-allowance-counts-towards-higher-rate-threshold who work it out like you do. Apologies.

Dazed_and_C0nfused

EthicsGradient said:

Dazed_and_C0nfused said:

EthicsGradient said:

abitpedantic said:

I’m looking for further clarification on the “corner” issue.

If I have £49970 income and £700 untaxed savings interest, how much tax do I owe on the latter? I can see arguments for either £40 (£200 @ 20%) or £80 (£200 @ 40%).

Similarly, if I received £2200 of dividends (and no savings interest) in the current FY would the tax owed be £17.50 (£200 @ 8.75%) or £67.50 (£200 @ 33.75%)?

(a) £40. The total is over £50,270, so the PSA is £500, leaving the £200. But you pay 20% on (49970-12570)=£37,400 on the earned income, leaving £300 in your basic rate, so you pay 20% on all the savings interest.

(b) Similarly in this year, yes, £17.50, with the same reasoning.

What I called the "corner" applies to people whose total income would have been up to £50,270, but an increase in savings income from at least £500 is what takes them over that. Eg earned income £49,570, savings income £700: no tax paid on savings interest (it's all inside the £1,000 PSA). Savings income £701: now your PSA is only £500, so you pay £40 on the other £200, despite having got only £1 more in interest.

That doesn't look right to me.

The earnings/pension of £49,970 would use all of the Personal Allowance and £37,400 of the basic rate band.

The first £300 of interest would be taxed at the savings nil rate of 0% but this uses all the remaining basic rate band.

The next £200 of interest uses the rest of the savings nil rate (0%), but is within the higher rate band.  

And the final £200 of interest is taxed at 40% so the tax due would be £80.

Ah, I see you're right, and I'm wrong - I thought the PSA was used in addition to other bands, but it's "laid on top of them". See eg https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/savings-and-tax#example-magda-how-income-within-the-personal-savings-allowance-counts-towards-higher-rate-threshold who work it out like you do. Apologies.

The whole thing is ridiculously complicated now with 0% tax rates and rate bands that sit within other rate bands etc!!