Quick question on Starting Savings rate

chubsta

Am trying to make sure I understand all this correctly.

My OH is self-employed with an annual income of £7000. She also has savings of £125,000 in an account which pays 4.20% per year, paid monthly, giving a yearly income of £5250. Her total income for the year is therefore £12250, which means she is below the income tax threshold. That bit I understand.

Now, there is also the Personal Savings Allowance which I understand means she can earn £1000 more in interest without having to pay tax even though her total income would be £13250 - is that correct?

Now to the bit that I am really confused about - the Starting Savings rate of £5000. Does this mean that she can earn as much interest as she can up to a total income of £18500 (£12500 tax allowance, £1000 PSA and £5000 SSR) or does it mean she can only earn up to a maximum of £6000 in interest without paying any tax on it despite her income from wages being well below the tax threshold?

Hope this makes sense

Albermarle

Does this mean that she can earn as much interest as she can up to a total income of £18570

Yes it does.

chubsta

Thanks very much for the quick reply, as you can imagine, that was the answer I was hoping for! (and for the correction on the extra £70)

ColdIron

She has 3 'allowances' available to her applied in this order

1. Personal Allowance - £12,570 (earned income and savings)
   
2. Starting Rate for Savings - £5,000 (savings only)
   
3. Personal Savings Allowance - £1,000 (savings only)

So a potential £18,570 available but as her earned income and her savings interest falls within her Personal Allowance, 2 and 3 don't come into play yet. She could earn £11,570 in savings (£18,570- £7,000) in savings before paying tax on it (or £6,320 more than she does now)

Dazed_and_C0nfused

chubsta said:

Am trying to make sure I understand all this correctly.

My OH is self-employed with an annual income of £7000. She also has savings of £125,000 in an account which pays 4.20% per year, paid monthly, giving a yearly income of £5250. Her total income for the year is therefore £12250, which means she is below the income tax threshold. That bit I understand.

Now, there is also the Personal Savings Allowance which I understand means she can earn £1000 more in interest without having to pay tax even though her total income would be £13250 - is that correct?

Now to the bit that I am really confused about - the Starting Savings rate of £5000. Does this mean that she can earn as much interest as she can up to a total income of £18500 (£12500 tax allowance, £1000 PSA and £5000 SSR) or does it mean she can only earn up to a maximum of £6000 in interest without paying any tax on it despite her income from wages being well below the tax threshold?

Hope this makes sense

You are along the right lines but there is a strict order.

Firstly the Personal Allowance has to be used.

Only once that has been used can any available savings starter rate band be used (up to £5,000 interest taxed at 0%).

And only once that has been used can the savings nil rate (aka Personal Savings Allowance) be used (up to £1,000 interest taxed at 0%).

As her total taxable income doesn't even use up her Personal Allowance (£12,570 not £12,500) then she cannot currently use either of the 0% rate bands available for savings interest.

NB.  If you were married she could apply for Marriage Allowance and have a reduced Personal Allowance of £11,310 and then some of her interest would end up being taxed at 0% (savings starter rate band).

chubsta

Thanks for the explanation, that was how I saw it but it is always a good idea to run it past more knowledgable people!