Effect of tax relief on tax on savings interest ?

mobfant

Hi all,

A quick q about whether paying extra into a (civil service) pension and thereby reducing my income tax bracket also reduces the rate at which I pay tax on interest on savings accounts.

The rough numbers for this FY are as follows: 
- Pre-tax salary at £60k
- Pensions contributions of £23k (compulsory contribution plus AVCs), which reduce taxable salary to £37k, so - as I understand it - the tax on my salary is the 20% basic rate (not including personal allowance)
- Separately, the pre-tax interest on my savings is £30k

This brings my total income to £90k this FY (pre tax and PRE-pensions) or £67k (pre-tax and POST-pensions)

Does that mean that I get taxed on my savings at:

- 20% basic rate tax on £13k of savings (the difference between £37k post-pension salary and the £50,270 basic rate) AND
- 40% higher rate tax rate on £17k of savings (anything that takes my income above £50,270)

Or

are all my savings taxed at 40% (so that I don't get an extra benefit from additional pension contributions?)

Many thanks!

Dazed_and_C0nfused

You are overcomplicating things.

Presumably your pension contributions are being made using the net pay method in which case your salary is if no real relevance, your starting point is your taxable pay, as would be reported on your P60.

The first £500 of your interest will be taxed at 0% (savings nil rate band) and this £500 uses up some of your remaining basic rate band.

The next slice of interest uses the remaining basic rate band.  And the final slice is taxed at 40%.

May not be relevant to you but if Child Benefit is a factor then you would have some HICBC to pay as well.

mobfant

Thanks. Although I’m still a bit confused… 

 Yes it’s the net pay method. No child benefit to worry about. 

So, my taxable pay this year should be 40000k ish then after my pension contributions are removed (my previous P60s won’t help because of career breaks and different contributions.)

£500 interest taxed at 0%. But that means only £9.5k of the basic band left until hitting £50,000.

 And then 40% tax on the rest of my savings interest (£7.5k) ?

Dazed_and_C0nfused

Unless you have any RAS pension contributions or Gift Aid payments (which increase your basic rate band) then yes.

The standard basic rate band is now £37,700 (£12,571 to ££50,270)

As your interest is at least £10k you will need to register for Self Assessment.

mobfant

Thanks that's super helpful. And noted re Self-Assesment, i'll look into that. First time this year now that interest rates are finally going up.

xylophone

First time this year now that interest rates are finally going up.

How long have you been in receipt of interest in excess of £10,000?

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

QrizB

mobfant said:

- Separately, the pre-tax interest on my savings is £30k

Am I right in thinking, from this number, you have £5-600k in cash savings?

Is none of it sheltered from tax in ISAs?

You have scope to pay more into your pension (or a separate SIPP) and reduce your 40% tax liability.

mobfant

xylophone said:

First time this year now that interest rates are finally going up.

How long have you been in receipt of interest in excess of £10,000?

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

Not long unfortunately, as interest rates have been low and most of the savings are new in this FY. There is a possibility that I breached the limit in FY22-23 so (as a result of Dazed and Confused's helpful message) I'm busy tracking down interest certificates from the various savings account I have or had so I know if I need to formally self-assess.

mobfant

QrizB said:

mobfant said:

- Separately, the pre-tax interest on my savings is £30k

Am I right in thinking, from this number, you have £5-600k in cash savings?

Is none of it sheltered from tax in ISAs?

You have scope to pay more into your pension (or a separate SIPP) and reduce your 40% tax liability.

You're not a million miles away from that figure. The likely interest above does not include interest from separate savings in ISAs, and in which I cannot put any more money this FY.

I had planned to max out my additional contributions via my salary (limited by how much I'm paid each month). I am comfortably within the £60,000 (I think it is?) limit of pension contributions each year, as I understand that I can also draw on unused allowances from the previous three Financial Years. I had a sabbatical in FY2022-23 and I'm waiting to hear back from the scheme as to whether I can draw on the unused allowance for that year, as I think I remained a member of the scheme albeit I didn't pay any contributions in as I was not being paid. But I was employed in FY2021-22 (and earlier) and didn't contribute more than the compulsory amount to my work pension.

I had looked into a separate SIPP but wasn't sure about this for two reasons (but I might be wrong or flawed in my thinking)

1) If I invested into a SIPP as well, the tax relief would come in the form of an additional contribution to the amount in the SIPP, once I had made the claim to HMRC as a higher rate taxpayer? Whereas if I only use the work pension scheme to make additional contributions, and then claim relevant (higher) rate tax back on the savings interest, the benefit from a tax reduction in my savings improves my current financial position by reducing the tax I pay this FY? i.e. I have more money now rather than more pension when I retire.

2) I would like to make additional pension contributions in the next financial year, for the same reasons as this year. As I am also saving for a house, I don't think I will have the savings to afford a SIPP on top of the additional contributions to my work pension both this FY and next FY. 

I would also aim to choose a tracker fund rather than actively manage my pension fund, so I don't see a need to have a separate SIPP that may have more options rather than funds with the organisation that my employer uses. Moreover,  their fees are competitive with the likes of ii or Vantage.

Dazed_and_C0nfused

1.  No, it's actually a bit of both.  With a SIPP you would be contributing using the RAS method so basic rate tax relief is automatically added to your pension fund i.e. your net contribution of say £2,000 becomes £2,500 in the pension.  

But any higher rate tax relief is a personal tax saving and benefits you, it doesn't get added to your pension pot.  It could simply be that you have a smaller Self Assessment liability than if you hadn't made RAS contributions.

mobfant

Dazed_and_C0nfused said:

1.  No, it's actually a bit of both.  With a SIPP you would be contributing using the RAS method so basic rate tax relief is automatically added to your pension fund i.e. your net contribution of say £2,000 becomes £2,500 in the pension.  

But any higher rate tax relief is a personal tax saving and benefits you, it doesn't get added to your pension pot.  It could simply be that you have a smaller Self Assessment liability than if you hadn't made RAS contributions.

Gotcha. Thanks, that's helpful to know.