Personal Savings Allowance

YankeeGran

What is the Personal Savings allowance for 2023/24? I thought it was £1000 for a non-tax payer, but I recently came across the statement below:

For 2023/24 it is £5,000. This means that up to £5,000 of the interest received from savings can be tax-free. You can earn up to £17,570 a year in 2023-24 (as long as your personal allowance is the standard £12,570) and usually still be eligible for the starting rate for savings.

What am I not understanding?

eskbanker

You're apparently not understanding the fact that you're referring to two completely different allowances!

The Personal Savings Allowance is £1K, or £500 for higher rate taxpayers.

The starter savings rate applies to up to £5K of interest for those with low incomes.

 All explained at:

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

Dazed_and_C0nfused

That tax is more complicated than it probably should be.

You have a Personal Allowance (usually but not always £12,570)

Once that has been used you have any available savings starter rate band (upto £5,000 interest taxed at 0%).

And only after that can you use the savings nil rate (aka Personal Savings Allowance) of upto £1,000 interest taxed at 0%.

windward10

I don't know if someone can tell me if I have this wrong or offer advice.

My wife and I are both retired and pay tax on our pensions. We both have the bulk of our money in separate savings accounts with a responsible banking organisation, a credit union. Unfortunately they do not announce the interest they pay until January of each year. The rates are very competitive, last year it was 1.75% for the whole year compared to the average of 1.2%(ish) elsewhere. So we would hope that we will get 4% or better this year. The rest of our savings have a range between 3.3% and 4% and so our total projected interest earned in 2023-24 is over £1000 each, if rates stay the same or increase.

On my wife’s £20,000 savings, at 4.5% I reckon she would earn around £1000 interest To reduce all her interest earned to below £1000, she would have to transfer £10,000 from the credit union into a Cash ISA. This would reduce the interest earned by £510 but on the current best rate Cash ISA she would only get £410 (ish). If she doesn’t open the cash ISA, she would pay tax on the amount over £1000 and probably pay £95 (£470 @20%).

My savings are even worse. I would earn £2250 interest, so I would have to close the Credit Union Account. The ISA would pay £820 interest but I would lose £1025 from the Credit Union. The tax on my extra interest would only be £250.

It seems I lose all ways. Have I got this right as it doesn’t seem worth the bother? Especially as we won’t know the interest rate until it is too late, but on the other hand it could be higher than I forecast and we would lose more????

eskbanker

windward10 said:

To reduce all her interest earned to below £1000

[...]

I would earn £2250 interest, so I would have to close the Credit Union Account

Focusing on trying to avoid paying tax misses the point - it's generally much better to evaluate net returns, in that 80% of a decent rate often beats 100% of a poor one.  As you recognise, you'd typically be able to secure more than 80% of taxable interest anyway, by virtue of the personal savings 'allowance', so you seem to be on the right lines in working out net return, but don't show enough figures to be able to validate your calculations....

Dazed_and_C0nfused

My wife and I are both retired and pay tax on our pensions. 

Are you paying enough tax to mean you lose all of the savings starter rate band or could that be something one or both of you can benefit from in your calculations?

Albermarle

Hopefully you both have no more than £85K with this credit union.

windward10

eskbanker said:

windward10 said:

To reduce all her interest earned to below £1000

[...]

I would earn £2250 interest, so I would have to close the Credit Union Account

Focusing on trying to avoid paying tax misses the point - it's generally much better to evaluate net returns, in that 80% of a decent rate often beats 100% of a poor one.  As you recognise, you'd typically be able to secure more than 80% of taxable interest anyway, by virtue of the personal savings 'allowance', so you seem to be on the right lines in working out net return, but don't show enough figures to be able to validate your calculations....

I am not sure what other figures are needed but I have collected what I can. To be honest I think I have confused myself a little bit more, but here goes:

Current situation:-

	Wife	Me
Projected interest from Savings	£    1,470.00	£    2,245.00
Pensions (Gross)	£  11,775.00	£  36,860.00
Total Income	£  13,245.00	£  39,105.00
Personal Allowance	£  12,570.00	£  12,570.00
Personal Savings Allowance	£    1,000.00	£    1,000.00
Less Marriage Allowance Transfer	£    1,260.00
Plus Marriage Allowance Transfer		£    1,260.00
	£  12,310.00	£  14,830.00
Income	£  13,245.00	£  39,105.00
Allowances	£  12,310.00	£  14,830.00
Taxable amount	£        935.00	£  24,275.00
Tax @ 20%	£        187.00	£    4,855.00
Nett Income	£  13,058.00	£  34,250.00		£  47,308.00
		Savings Interest		£    3,715.00
				£  51,023.00

 

The State and personal pensions are all taxed at source using a PAYE tax coding. The savings are from a number of different accounts with a range of interest rates.

If we jiggle the amount in individual savings accounts we can get a bit better balanced and earn a hundred or so extra in interest.

If we reduce the savings in the Credit Union by £17,000 odd each and put it into a Cash ISA this is what we get (I think).

	Wife	Me
Projected interest from Savings	£    1,000.00	£    1,000.00
Pensions (Gross)	£  11,775.00	£  36,860.00
Total Income	£  12,775.00	£  37,860.00
Personal Allowance	£  12,570.00	£  12,570.00
Personal Savings Allowance	£    1,000.00	£    1,000.00
Less Marriage Allowance Transfer	£    1,260.00
Plus Marriage Allowance Transfer		£    1,260.00
	£  12,310.00	£  14,830.00
Income	£  12,775.00	£  37,860.00
Allowances	£  12,310.00	£  14,830.00
Taxable amount	£        465.00	£  23,030.00
Tax @ 20%	£          93.00	£    4,606.00
Nett Income	£  12,682.00	£  33,254.00		£  45,936.00
		Savings Interest		£    2,000.00
Interest from Cash ISA	£        710.00	£        723.00		£    1,433.00
				£  49,369.00

 

If I have this right it just doesn’t make sense to take the money out of the higher earning account jus to save the tax. I think this is what you are saying.

@albermarle We would love to have more than 85k anywhere, but no we are well below the safety margin thanks.

molerat

Your wife can earn up to £5535 savings interest with no tax due - £11310 personal allowance + £5000 starter rate for savings + £1000 personal savings allowance = £17310 - pension income £11775 = £5535.  So if you are going to move some savings you can shift them across to her.

Dazed_and_C0nfused

@windward10

This is unlikely to make any practical difference to you but it does to your wife.

As she has applied for Marriage Allowance she is entitled to a reduced Personal Allowance of £11,310.

As she has a reduced Personal Allowance she will have to pay a small amount of tax on her pension income and this has the knock on effect of reducing her savings starter rate band from £5,000 to £4,535.

As the Marriage Allowance recipient you aren't entitled to any additional Personal Allowance.  You get the standard £12,570 plus a reduction of £252 off whatever your overall tax liability is.

Overall it seems worthwhile retaining Marriage Allowance but if Personal Allowance rates remain frozen it's likely that the benefit of it, as a couple, will reduce over time.

eskbanker

windward10 said:

[savings all in taxable accounts]

Nett Income	£  13,058.00	£  34,250.00		£  47,308.00
		Savings Interest		£    3,715.00
				£  51,023.00

 

[some savings moved to ISA]

Nett Income	£  12,682.00	£  33,254.00		£  45,936.00
		Savings Interest		£    2,000.00
Interest from Cash ISA	£        710.00	£        723.00		£    1,433.00
				£  49,369.00

Unless I'm misunderstanding your calculation, I think you're double-counting by adding the savings interest back in each of these, as it's already been included in the taxable income that flows down to the previous subtotal, so I think your total net income in the first scenario is £47,308, and in the second it's £45,936 + £1,433 (from non-taxable accounts) = £47,369, i.e. a pretty marginal comparison but slightly favouring the ISA option.