Tax on savings

Krakkkers

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Dazed_and_C0nfused

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

PloughmansLunch

Dazed_and_C0nfused said:

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

Is this the case for SA tax returns, or can (gross?) SIPP contributions also be used to reduce the higher tax due? I will be about £10k over the threshold due to interest income, but I’m not sure if it’s better to add to my SIPP or my works DB pension (the admin side of the latter being painfully slow, so would need to be well in advance).

Dazed_and_C0nfused

PloughmansLunch said:

Dazed_and_C0nfused said:

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

Is this the case for SA tax returns, or can (gross?) SIPP contributions also be used to reduce the higher tax due? I will be about £10k over the threshold due to interest income, but I’m not sure if it’s better to add to my SIPP or my works DB pension (the admin side of the latter being painfully slow, so would need to be well in advance).

SA returns are just a method of establishing someone's tax liability, they don't change how much is due.

If you make RAS contributions (within any relevant limits) then yes you will have an increased basic rate band.

If you want to see the impact and haven't filed your 2022-23 return yet you could enter some figures into the return without adding pension contributions.  Check the calculation result.  Then add in the pension contributions and check the calculation again to see what impact they have had.

Then discard the return or remove all the entries prior to doing it for real 😊

kuratowski

PloughmansLunch said:

Is this the case for SA tax returns, or can (gross?) SIPP contributions also be used to reduce the higher tax due? 

Contributions to a SIPP do use the RAS (relief at source) method so it works as Dazed described - the basic rate band is extended, to give you any higher rate relief that is due. 

Cloth_of_Gold

Dazed_and_C0nfused said:

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

Would you explain what you mean by the bolded part of your reply please?

Dazed_and_C0nfused

Cloth_of_Gold said:

Dazed_and_C0nfused said:

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

Would you explain what you mean by the bolded part of your reply please?

@Cloth_of_Gold

RAS pension contributions don't reduce your income for tax purposes so someone earning say £55k and paying £5k (gross) to a RAS scheme will still have taxable income of £55k.

But there are 3 specific benefits which come with RAS contributions. 

1.  You benefit from basic rate tax relief so you only paid £4k to get a £5k pension fund as the pension company adds 25% to your contribution (20% of the gross contribution).

2.  You're basic rate band is increased by the gross contribution so using the example above instead of being able to pay 20% tax on £37,700 you will have a basic rate band of £42,700.  This is how the higher rate relief is given, potentially getting a personal tax reduction of £946 in this example.

3.  The gross contribution reduces your adjusted net income, which is used to calculate both HICBC and tapered Personal Allowance.

Gift Aid contributions work in exactly the same way.  You make a qualifying donation of say £80.  The charity claims basic rate tax relief of £20 making a gross donation of £100.

That £100 has the same 3 benefits detailed above, the one subtle difference is that the original £20 in basic rate relief benefits the charity not you.

Cloth_of_Gold

Dazed_and_C0nfused said:

Cloth_of_Gold said:

Dazed_and_C0nfused said:

Krakkkers said:

If I earn just below higher rate tax (50k)
Then earn £8000 in savings interest is the tax on interest at basic rate or higher rate?.
Does the savings interest get added to your regular income to send you into the higher rate bracket.

Yes.

If your only other taxable income is exactly £50,000 then you will pay tax as below on the £8,000

£270 x 0% (savings nil rate (within your basic rate band))
£230 x 0% (savings nil rate (within your higher rate band))
£7,500 x 40% (savings higher rate)

If you are liable to HICBC then you would have an 80% charge to pay as well.

If you make RAS pension contributions or Gift Aid donations then you would have a larger basic rate band this would reduce the higher rate tax payable.

Would you explain what you mean by the bolded part of your reply please?

@Cloth_of_Gold

RAS pension contributions don't reduce your income for tax purposes so someone earning say £55k and paying £5k (gross) to a RAS scheme will still have taxable income of £55k.

But there are 3 specific benefits which come with RAS contributions. 

1.  You benefit from basic rate tax relief so you only paid £4k to get a £5k pension fund as the pension company adds 25% to your contribution (20% of the gross contribution).

2.  You're basic rate band is increased by the gross contribution so using the example above instead of being able to pay 20% tax on £37,700 you will have a basic rate band of £42,700.  This is how the higher rate relief is given, potentially getting a personal tax reduction of £946 in this example.

3.  The gross contribution reduces your adjusted net income, which is used to calculate both HICBC and tapered Personal Allowance.

Gift Aid contributions work in exactly the same way.  You make a qualifying donation of say £80.  The charity claims basic rate tax relief of £20 making a gross donation of £100.

That £100 has the same 3 benefits detailed above, the one subtle difference is that the original £20 in basic rate relief benefits the charity not you.

Thank you.