Tax on Savings - Low Pension Income.

Scot_39

Reading gov website,

It appears if withdraw under £12570 pa from pension as sole income, you get £5000 in tax free savings allowance.  So total = £17570

But if withdraw £12571+ you gain the £1000 as a basic rate taxpayer, but lose excess over £12570 from the £5000.

So can get 12570+4999+1000 tax free = £18569, by paying 20p tax on the £1.

I know that would be abnormal /  lot of savings, but just trying to understand rules.

Krakkkers

Not sure if you need to go above £12570 to get the basic £1000.

eskbanker

There are two separate 'allowances' (really nil-rate bands), the £5K starting savings rate and the £1K personal savings allowance - if your other income is below the £12,570 then you have both of these, not just the £5K, so the total is up to £18,570 either way round.

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

Scot_39

@Krakkkers

@eskbanker

Was basing that not on gov uk hmrc description, which wasnt that clear at all between the two,  but the income table at 

https://www.moneyhelper.org.uk/en/savings/types-of-savings/tax-on-savings-and-investments

Which I believe is a govt sponsored site.

Krakkkers

You can earn up to £17,570 a year in 2022-23 (as long as your personal allowance is the standard £12,570) and usually still be eligible for the starting rate for savings.

So you get the £1000 as well.

eskbanker

Scot_39 said:

@Krakkkers

@eskbanker

Was basing that not on gov uk hmrc description, which wasnt that clear at all between the two,  but the income table at 

https://www.moneyhelper.org.uk/en/savings/types-of-savings/tax-on-savings-and-investments

Which I believe is a govt sponsored site.

Nevertheless, it's wrong in suggesting that the personal savings allowance is only available to those with non-savings income over £12,570!

Scot_39

The problem lies in I think the interpretation of being a basic rate taxpayer.

The table at moneyhelper appears to take that literally as actually paying tax at the basic rate - which starts at £12571 of course.

And so by implication if under £12570 you are not a basic rate taxpayer, so don't get tge £1000 PSA

The MSE guide takes it as not paying higher rate tax, despite also saying as a basic rate taxpayer = £1000 in its description.

So  MSE example of sub £12570 which it says attracts the £1000, falls into the no tax at moneyhelper where it doesn't.

One is obviously wrong.

Hence adding to the confusion.

Krakkkers

Moneyhelper website appears to differ and i think is wrong. I think you get £6000 tax free interest if you are a non tax payer below £12570.

Scot_39

Thanks for the replies.

xylophone

Let's suppose that you have no income at all (for example, you are a young person living at home and your parents provide for all your needs).

You suddenly find that you have come into a legacy of £500,000.

You use your ISA allowance for £20,000 so receive the interest on this tax free.

However, you still have £480,000 which you spread round various deposit accounts and at the end of the tax year, you find that you have accrued interest totalling £18, 570.

You would report this non isa  interest to HMRC on a tax return (because you have received non-isa interest in excess of £10,000) but you would not  be due to pay any tax on your interest because

£12, 570 uses your personal allowance
     5000   uses the starter rate for savings
      1000   uses the personal savings allowance.

You would no doubt then make a full subscription of £20,000 to your ISA and then assess your non isa savings income for the new tax year against  the allowances as explained above.

Let's take another person who earns £12,570 a year. This uses his Personal Allowance.

He makes a full year's subscription to an ISA so receives all interest on this tax free.

However, he has various other savings accounts and at the end of the year he finds that he has earned £6000 in interest.

He will pay no tax on the £6000 because

£5000 is covered by the starter rate for savings.

£1000  is covered by the personal savings allowance.


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

Scot_39

Thanks @xylophone

In the Thomas part 2 example - at last a low income example - where despite £0 income from pension or salary - it says as you say - you get IT PA "£12570", "£5000" starter band and then £1000 PSA - in that order.

But even on your link it specifically says you have to be "a basic rate taxpayer" to benefit from PSA £1000.  Which is what HMRC site says and arguably is what moneyhelper table - perhaps interprets as after 12571 taxable earnings - to add the PSA £1000.

PS I've bookmarked the litrg site for future reference