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

xylophone

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

Your wife's personal allowance is £11,310., not £12,570.

She has non savings income of £7208.

She has savings income of £7650.

Her PA exceeds her non savings income by  £4102.

£4102 of her savings income is therefore tax free.

Next consider the starter rate for savings (£5000), a 0% tax rate.

The remaining £3548 of her savings income is well within the SRS.

Therefore she cannot  use the PSA because she doesn't need to do so.

If  the remaining savings income had been £5000 rather than £3458, that £5000 would have  have been tax free because taxed at 0%.

If it had been £6000, it would have been tax free because she would have used her PSA (£1000 taxed at 0%).

If her savings income had been over £10,000, she would have needed to advise HMRC (self assessment).

sparkyspark

I think I see how you've worked it out now, the total interest is firstly offset against the remaining Personal Allowance, the remaining interest is then offset against the SSR, of which in this case there is not enough interest left to use up the whole £5000 SSR, therefore the PSA is not needed unless she accrues more interest, which would then firstly use up the whole SSR and then the PSA would still be available if needed.
In a nut shell she has no taxable income.

Dazed_and_C0nfused

sparkyspark said:

Dazed_and_C0nfused said:

Not quite, you've got it the wrong way round.  She cannot benefit from the savings nil rate band (aka PSA).

The interest will be dealt with as follows,
£4,102 covered by Personal Allowance

£3,548 taxed at 0% (savings starter rate)

I thought that if the only income is her State Pension of £7208 and because she's under her £11310 Personal Allowance, she then qualifies for the full £6000 Savings Allowance to cover the first £6000 of savings interest totalling £7208, and still has a Personal Allowance shortfall of £4102 to cover the extra interest difference incurred of £1650 if that makes sense?
Quote on Martin Lewis Tax-free savings: check if you're eligible - Money Saving Expert

The amount you have as income – for example, from a job or a pension – affects whether your savings interest is tax-free. Let's take the three main scenarios for non-savings income...

1. You earn less than £12,570. Here it's fairly simple. You benefit from both the £5,000 starting savings allowance – where you pay 0% tax, plus the personal savings allowance of £1,000. So, you can earn a total of £18,570 from income and savings interest without paying any tax.
   
2. What is the £5,000 starting savings rate?

If you earn less than £17,570, the starting savings rate allows you to earn up to £5,000 in savings interest completely tax-free. This is in addition to your personal income tax allowance and personal savings allowance.

You could say "qualifies" for them but you have to use them in a strict order,

Spare Personal Allowance is used first.

Then any available savings starter rate band.

And only after that is used can she use the savings nil rate band (aka PSA).

So she simply doesn't have enough taxable income to be able to use the savings nil rate band.

sparkyspark

Many thanks Dazed_and_C0nfused and xylophone, your patience and explanations are much appreciated  

Tunstallstoven

I'll second those thanks....  I didn't realise how green and confused I actually was on all this!  I'm still not 100% clear but certainly much clearer than I was.  So thanks everyone.  

Dazed_and_C0nfused said:

In the second scenario your wife's tax code is going to change as the interest will use her spare Personal Allowance.

So at some point expect it to become 1000N.

Personal Allowance 11,310 less untaxed interest 1,310 = tax code allowances 10000.

This is one thing that it would be great to get more info and a better understanding on.  Would you be able to explain why, or give a link to some further reading please?  I didn't realise that would be a possibility.  If the tax code changes does that mean she loses some of her PA? 

Guess I'm also interested to know if this applies to all scenarios?  IE if a basic normal tax payer with 1257 code consistently earns beneath their PA, does their tax code change?  

Many thanks

Dazed_and_C0nfused

Tunstallstoven said:

I'll second those thanks....  I didn't realise how green and confused I actually was on all this!  I'm still not 100% clear but certainly much clearer than I was.  So thanks everyone.  

Dazed_and_C0nfused said:

In the second scenario your wife's tax code is going to change as the interest will use her spare Personal Allowance.

So at some point expect it to become 1000N.

Personal Allowance 11,310 less untaxed interest 1,310 = tax code allowances 10000.

This is one thing that it would be great to get more info and a better understanding on.  Would you be able to explain why, or give a link to some further reading please?  I didn't realise that would be a possibility.  If the tax code changes does that mean she loses some of her PA? 

Guess I'm also interested to know if this applies to all scenarios?  IE if a basic normal tax payer with 1257 code consistently earns beneath their PA, does their tax code change?  

Many thanks

It would only change if either there is tax to pay on the interest or, as in your wife's case the interest uses some or all of her spare Personal Allowance.

You only lose some of your Personal Allowance in two scenarios.

1.  You apply for Marriage Allowance

2.  Your adjusted net income exceeds £100k

Tax code 1000N would mean exactly £0.00 tax would be deducted from a pension of £10,000.

Tunstallstoven

So if that happened, but then the next year her income (from wages) was higher and above £11,310, would the tax code go back up again?  If not, it would seem she would be being penalised and I can't understand why?!

Many thanks

Dazed_and_C0nfused

Tunstallstoven said:

So if that happened, but then the next year her income (from wages) was higher and above 1170, would the tax code go back up again?  If not, it would seem she would be being penalised and I can't understand why?!

Many thanks

I presume you mean £11,700 not 1170 but yes, on those taxable wages she will be paying tax.

11,700 less tax code allowances of 11,310 = 390 to be taxed.

If HMRC know her taxable earnings are expected to be £11,310 or more and she doesn't have enough savings interest to have to pay any tax on the interest then there would be no tax code deduction for interest as she doesn't have any spare allowances.

Tunstallstoven

Actually, I meant £11,310!  Sorry about that, have amended my error above.  

What I was trying to say was that if for a time her earnings were low and her tax code changed to 1000N, but then in a subsequent year she earnt more than - let's say - £12,000, would she pay tax on the proportion above £10,000 based on the 1000N tax code?  Or would her tax code change back to 1131N meaning she pays tax on the proportion above £11,310?  

Thanks for your patience

Dazed_and_C0nfused

Tunstallstoven said:

Actually, I meant £11,310!  Sorry about that, have amended my error above.  

What I was trying to say was that if for a time her earnings were low and her tax code changed to 1000N, but then in a subsequent year she earnt more than - let's say - £12,000, would she pay tax on the proportion above £10,000 based on the 1000N tax code?  Or would her tax code change back to 1131N meaning she pays tax on the proportion above £11,310?  

Thanks for your patience

Providing HMRC used the £12,000 (or anything £11,310 or above) as an estimate of her earnings then her code would revert to 1131N.

But there can be a lag between a tax code being calculated say now, ready for the new tax year, and circumstances changing mid year so it's best to make sure HMRC have accurate estimates of earnings.

At the end of the day no one knows what someone would expect to earn better than individual themselves.  HMRC can only ever estimate things based on the latest information available when the tax code is calculated.

They wouldn't, as far I know, guess that someone would get an x% pay rise part way through the year.