Is savings interest included in calculating your tax band?

poppystar

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.

Looking at that link it says

If you do have to pay tax on your bank and building society interest, and if you normally complete a tax return, then you can include the amount of savings income in the relevant section.

If you do not normally complete a tax return, you should tell HMRC about the taxable income by 5 October after the end of the tax year in which it arose (so 5 October 2023 for the tax year ending 5 April 2023). If they can, HMRC will take the extra tax you owe from your wages by changing your Pay As You Earn (PAYE) code. If they cannot adjust your tax code, they may send you a bill at the end of the tax year or ask you to fill in a tax return.

…and therefore suggests you need to tell HMRC about the taxable savings interest. I thought that was only necessary if it exceeded £10k? 

Dazed_and_C0nfused

poppystar said:

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.

Looking at that link it says

If you do have to pay tax on your bank and building society interest, and if you normally complete a tax return, then you can include the amount of savings income in the relevant section.

If you do not normally complete a tax return, you should tell HMRC about the taxable income by 5 October after the end of the tax year in which it arose (so 5 October 2023 for the tax year ending 5 April 2023). If they can, HMRC will take the extra tax you owe from your wages by changing your Pay As You Earn (PAYE) code. If they cannot adjust your tax code, they may send you a bill at the end of the tax year or ask you to fill in a tax return.

…and therefore suggests you need to tell HMRC about the taxable savings interest. I thought that was only necessary if it exceeded £10k? 

You would normally need to do that for untaxed income but as HMRC get interest details direct from banks and building societies they don't need you to do that for interest.

You should register for Self Assessment if the interest exceeds £10k

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