Tax on Interest from Savings. A few questions if anyone can help please?

Tunstallstoven

Hi

I just wanted to check that I've correctly understood a few things I've been reading today.  If anyone could confirm I'm right or correct me if I'm wrong, that would be a great help thanks.  I'm a basic rate tax payer.  

1. For paying tax on interest from savings, I need to look at how much I earn from all sources including the interest earned from savings?  Is that right? 

2. To work out my "threshold", I add my Personal Allowance + Starting Rate for Savings (£5,000) + Personal Savings Allowance (£1,000).  I have Marriage Allowance, so my tax code is 1389M.  Therefore, so long as my total earnings doesn't exceed £19,890 I won't have to pay tax on interest from savings.  Is that correct?  

3. More hypothetically speaking - but so that I know for the future) - if I have money in a Cash ISA and/or Premium Bonds, because the interest is not taxable does that mean I do not include it when calculating my total income to see if I'm below or above my "threshold"?  

Sorry if that's not been put in the clearest or most succinct way...  It's been a long day!!!  

Many thanks

Ocelot

You won't get the 5k Starting rate for savings if your income exceeds the tax free allowance.

The PSA is the amount you can earn on taxable savings income before paying tax on it.

For example if you are earning 40k and get 1.2k in interest pa, you would pay 20% on £200.

Be aware that total taxable (ie non-ISA) savings income can push you into the higher rate threshold, where uou would only get £500 PSA and have to pay 40% on everything above that.

Tunstallstoven

Many thanks for your response.  

Would you mind clarifying what you mean by:  

Ocelot said:

You won't get the 5k Starting rate for savings if your income exceeds the tax free allowance.

Ta

xylophone

Read through

https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/savings-and-tax

Ocelot

Most people's income is too high to qualify for this staritng rate.

It's designed to help those on very low incomes and pensioners.

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

Starting rate for savings

You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.

The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.

If your other income is £17,570 or more

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

If your other income is less than £17,570

Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

Tunstallstoven

Thanks for the additional info.  From what I can see, nothing in the last two posts contradicts what I wrote in my original post.  But not sure if I'm missing something??  

Perhaps some example figures will help get clarity...   

Let's use my tax code of 1389M.

Let's say there is an annual wage of £17,500.  And let's say there is income from savings interest of £2,000 over the year.  No other income, so a total annual income of £19,500.  

Would any tax be due on the savings interest?  

I don't think so, but am happy to be proven wrong!  

Ocelot said:

You won't get the 5k Starting rate for savings if your income exceeds the tax free allowance.

I'm still puzzled by that sentence I'm afraid   

Thanks again for taking the time to help.

TheAble

You lose £1 of the SRFS for every £1 you earn over the 12.5k personal allowance. So at 17.5k it's lost completely.

You still get the £1k basic rate allowance though. So with £2k savings interest you have to pay tax on half of it.

Tunstallstoven

Thanks, I seem to have somehow kept missing that vital bit of info!  Sorry to everyone for being a bit slow and thanks for sticking with me.  

Part of the problem I think was this article:

https://www.moneysavingexpert.com/savings/tax-free-savings/

It does go on to explain the "£1 of the SRFS for every £1 you earn over the 12.5k personal allowance" bit toward the bottom.  but the article starts with "If you earn less than £18,570 a year from income and savings interest, then all your savings interest will be tax-free".  I think I was unintentionally picking out the bits I wanted to hear and glossing over the bits I didn't want to hear!  

So back to my example, and see if I can get it right this time...  Tax code 1389M.  Annual wage £17,500.  Income from savings interest of £2,000 over the year.  

- Non savings income (£17,500) - Personal Allowance (£13,890) = £3,610.  
- £5,000 - £3,610 = £1,390 SRFS available.
- £1,000 PSA.  

So £2,390 can be earned in savings interest tax free.  

Am I getting any closer to being right?!?  

Huge thanks  

EthicsGradient

I haven't used the Marriage Allowance myself, but the link below says you apply it after you work out the rest of the tax. Quite how you've ended up with a code of 1389M I can't see, because £12,570 + £1,260 = £13,830, not £13,890. Perhaps that means HMRC used previous earnings to estimate it somehow.

I think, from this: https://www.gov.uk/apply-tax-free-interest-on-savings , the calculation would be:
Starting Rate for Savings  is £5,000, minus (£17,500 - £12,570), ie minus £4,930, so £70. So you can get £1,070 (adding the £1,000 PSA) in interest before paying tax on it.

Note that the recipient spouse or civil partner does not receive an extra personal allowance of £1,260: instead they receive a tax credit of £252 that can be set against their tax liability.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

35har1old

EthicsGradient said:

I haven't used the Marriage Allowance myself, but the link below says you apply it after you work out the rest of the tax. Quite how you've ended up with a code of 1389M I can't see, because £12,570 + £1,260 = £13,830, not £13,890. Perhaps that means HMRC used previous earnings to estimate it somehow.

I think, from this: https://www.gov.uk/apply-tax-free-interest-on-savings , the calculation would be:
Starting Rate for Savings  is £5,000, minus (£17,500 - £12,570), ie minus £4,930, so £70. So you can get £1,070 (adding the £1,000 PSA) in interest before paying tax on it.

Note that the recipient spouse or civil partner does not receive an extra personal allowance of £1,260: instead they receive a tax credit of £252 that can be set against their tax liability.

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

They do receive £1260 allowance that's why the tax code is1383M which saves you £252

How it works

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).

xylophone

So £2,390 can be earned in savings interest tax free.  

No.

https://www.moneyhelper.org.uk/en/work/employment/marriage-and-married-couples-allowance#:~:text=Of the amount of money,before tax is worked out.

Of the amount of money transferred to a partner as part of Marriage Allowance – 20% is given as a reduction in their tax bill. This is different from Personal Allowance – which is deducted from taxable income before tax is worked out.

Therefore, if your pension is £17,500 per annum, you would normally expect to pay £986 per annum in tax.

MA gives you a tax credit of £252 so that you will pay only £734.

With regard to the starter rate for savings, your pension has used up  £4930.

If your savings interest is £2000, £1070  is tax free  (£70 SRA and £1000 PSA) while the balance is taxed at 20%.

https://community.hmrc.gov.uk/customerforums/pt/50cbdc41-a74b-ed11-97b2-00155d9c9a65