Scared of exceeding PSA

Doctor_Who

zagfles said:

SaveTheEuro said:

If you use pension contributions to keep your effective income below the higher rate threshold, do you qualify for a Personal Savings Allowance of £500 or £1,000? I'm assuming it is £500 because although you wouldn't be paying 40% tax on any of your income you would be enjoying 40% tax relief on your pension contributions. Is that right?

No. If pension contributions take you out of the 40% tax band then you have a £1000 PSA. But your income including all your interest will have to be in the basic rate band. Interest covered by the PSA still uses up the basic rate tax band.

For instance if you had £60k salary and contributed £10500 gross to a pension, your earned taxable income would be £49500, but if you had £1k of interest that would put you in higher rate tax band so you'd only get a £500 PSA.

)

Yes, the PSA is not an 'allowance' (despite its name), it's £1000 of savings interest taxed at 0%. So it uses up the basic rate band despite no tax being payable.

haze23

This thread's moved on a lot but thanks to those who responded to my earlier scenarios and provided explanations. That the finer points caused discussion amongst the knowledgeable contributors here leaves me unsurprised I didn't get it entirely correct, and I can see similar queries still cropping up.

My takeaways: I was unaware of the effect of PA (will need to read up), these things are always more complicated than at first sight, and treating the PSA as a 0% band is likely a useful aid to calculations.

Thanks again.

Ocelot

zagfles said:

Ocelot said:

zagfles said:

John464 said:

Bigwheels1111 said:

I can’t understand it either.
2 years ago 100k would have given 1k, now 6.2k interest.
Even after tax I would be jumping for joy.

Sorry to burst your bubble but what matters is the Real rate of interest.
Net interest rate minus inflation
So even at 6.2% interest you could be losing more than you were losing last year

Indeed. If you get 6% interest when inflation is 8% your investment is losing value. Strange how people don't seem to understand this. £1 this year is not worth as much as £1 last year. 

Getting taxed on an investment which isn't increasing in value is effectively a wealth tax, not an income tax. That I guess is why some people object to paying tax. In the same way as they might complain about other stealth taxes which use inflation to hide them, for instance freezing tax thresholds etc.

Whereas it is true that long term inflation erodes your capital, short term inflation can have little effect if you have large amounts of capital.

If inflation is, say 5%, and you are spending 10000 a year on inflation-affected items, your new annual spend would be 10,500. If you had been earning 0.5% on 100,000 savings, that would be 500, net spend 10,000 still.

However, if inflation was 7%, a 5% return on 100,000 would be 5,000, and your net spend would be 10,000+700- 5,000 (almost half of what it would have been with lower rates).

Longer term, however, the effect of inflation would be compounded, so you'd need more and more return to stand still.

What I think you're saying is short term you might not notice the effect of inflation. Cashflow looks great, you're earning far more interest than your cost of living has increased. Interest is 10x what it was, your cost of living is only 7% more! Happy days! 

I was, indeed, saying that (in the first sentence), but perhaps I could have made it clearer