Scared of exceeding PSA

Kaizen917

Apologies if I missed it somewhere in the thread but how exactly should I be paying the tax in excess of the 500 PSA? I had a look at the tax return checker on the gov.uk site and it claims that I do not need to submit one based on my circumstances. 

Personally, I have no issue paying the tax itself, it wont be much for me anyway, but the logistics of it to calculate across different savings accounts could be a bit of a nightmare.

eskbanker

Kaizen917 said:

Apologies if I missed it somewhere in the thread but how exactly should I be paying the tax in excess of the 500 PSA? I had a look at the tax return checker on the gov.uk site and it claims that I do not need to submit one based on my circumstances. 

Personally, I have no issue paying the tax itself, it wont be much for me anyway, but the logistics of it to calculate across different savings accounts could be a bit of a nightmare.

Yes, unless there are other reasons to self-assess, you only need to do so for savings interest income if it exceeds £10K.

Assuming you don't, then no further action needed, the banks will notify HMRC of what they've paid you and HMRC will adjust your tax code to collect the tax due via PAYE, a full tax year in arrears, i.e. 2023/24 tax would be collected in 2025/26.

Having said that, you'd be well advised to calculate the total interest figure yourself, as it's not unheard of for HMRC to get it wrong....

masonic

haze23 said:

Hi, new to the forum, hoping someone can clarify the treatment of tax on interest, crux being multiple rates or not. I've only managed to find corner cases, this thread is the closest I've found to a fuller explanation. Seemed relevant enough to be applicable here, apologies if not.

Am I correct in thinking that the tax on interest that takes total income above £50270 is calculated as:

• (amount up to 50270 - 500) @ 20% + (amount over 50270) @ 40% ?

Some hypothetical numbers to illustrate the point.

• Salary 46270 + interest 7000 = 53270
• Total > 50270 => PSA 500
• Taxable @ 20% = (50270 - 46270 - 500) = 3500
• Taxable @ 40% = (53270 - 50270)           = 3000
• Total tax payable on interest = (700 + 1200) = £1900
  

Assuming correct, is this then affected by salary sacrifice into pension? Again, to illustrate, approx. 8% (£3700) sacrifice.

• Adjusted salary + interest = (46270 - 3700) + 7000 = 49570
• Now total < 50270 => PSA 1000
• Interest taxable @ 20% = (7000 - 1000)
• Tax payable on interest = £1200

Apologies again if I've gone OT.

You are correct that salary sacrifice into a pension reduces your taxable income and can recover the £1000 PSA, and avoid higher rate tax. Worked examples look ok to me.

zagfles

haze23 said:

Hi, new to the forum, hoping someone can clarify the treatment of tax on interest, crux being multiple rates or not. I've only managed to find corner cases, this thread is the closest I've found to a fuller explanation. Seemed relevant enough to be applicable here, apologies if not.

Am I correct in thinking that the tax on interest that takes total income above £50270 is calculated as:

• (amount up to 50270 - 500) @ 20% + (amount over 50270) @ 40% ?

Some hypothetical numbers to illustrate the point.

• Salary 46270 + interest 7000 = 53270
• Total > 50270 => PSA 500
• Taxable @ 20% = (50270 - 46270 - 500) = 3500
• Taxable @ 40% = (53270 - 50270)           = 3000
• Total tax payable on interest = (700 + 1200) = £1900
  

Assuming correct, is this then affected by salary sacrifice into pension? Again, to illustrate, approx. 8% (£3700) sacrifice.

• Adjusted salary + interest = (46270 - 3700) + 7000 = 49570
• Now total < 50270 => PSA 1000
• Interest taxable @ 20% = (7000 - 1000)
• Tax payable on interest = £1200

Apologies again if I've gone OT.

The second example is correct, that's easy.

The first is wrong, and complicated because the PA (ie personal allowance, the £12570, not the PSA), can be allocated to the interest if that's more tax efficient. So could allocate £4000 PA to the interest, which would mean £4000 less PA allocated to salary. Salary still all in the 20% band.

So, £4000 interest covered by the PA, then £3000 of interest in the 40% tax band of which £500 is covered by the PSA, so tax on £2500 of interest taxed at 40%, =£1000. 

Plus £4000 extra employment income taxed at 20% tax, so £800.

So the interest has caused £1800 extra tax.

See this similar (but slightly more complicated) example https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim1110

masonic

It shouldn't matter whether employment income or savings interest consumes the PA, as the income tax rates on these types of income are the same in this example. Upon closer inspection, the error was in applying the PSA in a way that it reduced basic rate tax rather than higher rate tax.

Taxable @ 20% = (50270 - 46270) = 4000

Taxable @ 40% = (53270 - 50270 -500) = 2500

Total tax payable on interest = (800 + 1000) = £1800

... or you could have a separate line "Taxable @ 0% = 500" with the remaining £6500 distributed as above.

spider42

masonic said:

It shouldn't matter whether employment income or savings interest consumes the PA, as the income tax rates on these types of income are the same in this example. Upon closer inspection, the error was in applying the PSA in a way that it reduced basic rate tax rather than higher rate tax.

But that is the way the PSA works. It is always allocated to the lowest part of the interest first, in other words to interest otherwise liable to basic rate before amounts otherwise liable to higher rate tax. (Section 12A(4) ITA2007). So that part of it was 'correct'.

As zagfiles has said, the way the personal allowance is allocated is critical. You allocate the personal allowance in such a way that you eliminate all of the interest falling within the basic rate band. That way, ALL of the taxable interest remaining falls within the higher rate band, and therefore the PSA is saving higher rate tax rather than basic rate tax. This can only happen if the personal allowance has been allocated in the most beneficial way.

masonic

spider42 said:

masonic said:

It shouldn't matter whether employment income or savings interest consumes the PA, as the income tax rates on these types of income are the same in this example. Upon closer inspection, the error was in applying the PSA in a way that it reduced basic rate tax rather than higher rate tax.

But that is the way the PSA works. It is always allocated to the lowest part of the interest first, in other words to interest otherwise liable to basic rate before amounts otherwise liable to higher rate tax. (Section 12A(4) ITA2007). So that part of it was 'correct'.

As zagfiles has said, the way the personal allowance is allocated is critical. You allocate the personal allowance in such a way that you eliminate all of the interest falling within the basic rate band. That way, ALL of the taxable interest remaining falls within the higher rate band, and therefore the PSA is saving higher rate tax rather than basic rate tax. This can only happen if the personal allowance has been allocated in the most beneficial way.

I thought the PSA was a nil rate band inserted before the basic rate band (and subsequently higher rate band if relevant). Is that understanding incorrect?

So, first £500 @ 0%, next band up to HR threshold @ 20%, then remainder @ 40%. PSA should not reduce the width of the BR band surely?

The "-500" in the 40% figure in my previous post is there to signify the 500 of interest already having been allocated to the PSA, therefore it shouldn't be allocated again to the HR band.

Edit: to answer my own question, I think my misunderstanding is viewing PSA as an "allowance" rather than a nil-rate band, so it *would* reduce the width of the BR band if applied like this.

Dazed_and_C0nfused

If the Personal Allowance was simply used in the traditional way, against earnings first, then the first slice of interest taxed at 0% would use some of the remaining basic rate band.

Better to have the PA allocated slightly differently so that the additional earnings subject to tax (no longer covered by the Personal Allowance) use the basic rate band and the first slice of interest subject to tax falls into the higher rate band instead of wasting some of the basic rate band.

I think!

Ocelot

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.

zagfles

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.

Inflation has exactly the same effect on your capital regardless of how much you have, or how much you spend. If inflation is 7%, then £1 a year ago has the same value as £1.07 now. You need your capital to grow by 7% in nominal terms just to maintain its value. If it doesn't, either because net (after tax) interest rates are less than 7%, and/or you've spent the interest, then you are effectively spending capital.  If you had £100k a year ago, and you have £107k now, then you're in the same position in terms of capital. If you have less, then you've spent capital.

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! 

But it's an illusion. All that interest is only compensating for the loss in value of your capital, and then only partially (if interest is less than inflation).