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

Dazed_and_C0nfused

Tunstallstoven said:

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  

Marriage Allowance doesn't entitle you to any extra Personal Allowance, it's a tax reducer i.e. you get £252 knocked off your tax liability.

Assuming you have claimed £60 of work related expenses then your non savings income is using the whole of your Personal Allowance and £4,870 of your basic rate band (£17,500 less £60 less £12,570 = £4,870).

This means you are only entitled to £130 of the savings starter rate (interest taxed at 0%).

Plus you will get the full £1,000 savings nil rate band (interest also taxed at 0%).

So your £2,000 of taxable interest will be taxed,
£130 x 0% (savings starter rate) = £0
£1,000 x 0% (savings nil rate) = £0
£870 x 20% (savings basic rate) = £174

And then you can then deduct £252 from your overall tax liability for the Marriage Allowance credit you are entitled to.

Note all the above is assuming your P60 will show taxable pay as £17,500.

TBC15

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

I think the OP may live in Scotland that would give him a code of 1389M.

Dazed_and_C0nfused

TBC15 said:

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

I think the OP may live in Scotland that would give him a code of 1389M.

If the op was Scottish resident the code would have an S prefix i.e. S1389M.

1389M could be made up from millions of permutations of tax code allowances and deductions but a likely scenario is £12,570 + £1,260 + £60 (flat rate expenses such as uniform cleanings).

Tax code allowances 13890 inclusive of Marriage Allowance = tax code 1389M.

Tunstallstoven

Sorry for the radio silence, I'm really struggling to get my head round all this and there's a lot of info I was totally unaware of. 

I'll read through a couple more times and check out all the links again to see if I can get my head in order! 

But for starters, am I right in saying: 

- I don't pay tax on my first £13,890 of income
- My tax code is 1389M, which reflects the above (no tax on first £13,890 of income)
- But in spite of those two things, my Personal Allowance is £12.570 

Is that right??  

I note here it says:

The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on.  Your Personal Allowance may be bigger if you claim Marriage Allowance.... 

https://www.gov.uk/income-tax-rates

That would then contradict the above wouldn't it?  

Don't get me wrong, I'm not saying I think I'm right.  I'm just trying to illustrate my confusion!  

Huge thanks for the help and time in all of the replies

xylophone

I think that you are failing to understand that the marriage "allowance" is just a tax credit.

https://www.gov.uk/marriage-allowance

See D&C's post above.

Dazed_and_C0nfused

You should completely ignore Marriage Allowance until the very last moment.

That guidance is a massive over-simplification and factually incorrect.

You cannot have a Personal Allowance greater than £12,570.

After your tax liability has been calculated receipt of Marriage Allowance will reduce the amount due by £252.

Tunstallstoven

OK, that's all understood, thank you.  I'm just a very black and white thinker and that doesn't help me understand things sometimes.  IE - my brain says 1389 tax code = £13,890 PA.  But I understand what you're saying and thank you for sticking me with me.  

Onto a separate but related question if I may please....   

From what I understand thanks to the posts and links above, unlike with my PA, my wife's does indeed change to £11,310.   

Again, just using some made up figures, if my wife has a wage of £10,000 but income from savings of £5,000, are we able to claim Marriage Allowance?  From what I remember earnings need to be below the basic threshold to claim marriage allowance.  But is that all earnings, including those form savings interest?  

Thanks again

Dazed_and_C0nfused

Tunstallstoven said:

OK, that's all understood, thank you.  I'm just a very black and white thinker and that doesn't help me understand things sometimes.  IE - my brain says 1389 tax code = £13,890 PA.  But I understand what you're saying and thank you for sticking me with me.  

Onto a separate but related question if I may please....   

From what I understand thanks to the posts and links above, unlike with my PA, my wife's does indeed change to £11,310.   

Again, just using some made up figures, if my wife has a wage of £10,000 but income from savings of £5,000, are we able to claim Marriage Allowance?  From what I remember earnings need to be below the basic threshold to claim marriage allowance.  But is that all earnings, including those form savings interest?  

Thanks again

No, "we" aren't able to claim Marriage Allowance.  No one can "claim" it.

If your wife has a Personal Allowance of £11,310 she has already applied for it.  

Her income would be taxed like this,

Taxable earnings
£10,000 is covered by Personal Allowance

Savings interest 
£1,310 is covered by Personal Allowance

£3,690 is taxed at the savings starter rate (0%).

Providing neither of you are higher rate taxpayers you are both eligible for Marriage Allowance 

Tunstallstoven

OK, thanks.  Perhaps "claim" was the wrong word.  Is "apply for" better?  

So here where it says "You can benefit from Marriage Allowance if all the following apply... 2. You do not pay Income Tax or your income is below your Personal Allowance (usually £12,570).  3. Your partner pays Income Tax at the basic rate, which usually means their income is between £12,571 and £50,270"

https://www.gov.uk/marriage-allowance

So I thought for the person transferring part of their PA that #2 had to be the case?

Dazed_and_C0nfused

Tunstallstoven said:

OK, thanks.  Perhaps "claim" was the wrong word.  Is "apply for" better?  

So here where it says "You can benefit from Marriage Allowance if all the following apply... 2. You do not pay Income Tax or your income is below your Personal Allowance (usually £12,570).  3. Your partner pays Income Tax at the basic rate, which usually means their income is between £12,571 and £50,270"

https://www.gov.uk/marriage-allowance

So I thought for the person transferring part of their PA that #2 had to be the case?

No, it's an over-simplification as it doesn't factor in that some income above the Personal Allowance might be taxed at 0%.

Your wife being a perfect example.

If her income was £15,000 from a job or pension then it would be different. 

Everyone needs to look at their own personal circumstances to see if they, as part of a couple, would benefit from applying.

NB.  If people could "claim" it there could be chaos with one spouse deliberately making the other pay tax just to get themselves a refund!!