Savings tax trap

After watching Martin on ITV I started looking at saving and tax.  I found out about a couple of things on the show and looking at accounts after that I didn't know, flexible Cash ISA where you can take money out of the ISA but then put it back in the same tax year and not lose the ISA wrapper, i.e. 20k in on 6 April, 10k out on 6 May, 10k back in on 6 Feb, all still in the ISA wrapper.  And from the show, that ISA rates are on a par with non ISA rates (they used to be way lower).

In my digging I found this


It took me a bit to grasp this, so let me see if I can explain it better.

Take a couple with main earner on say £40k so they just pay 20% tax.  Partner is on a low salary, say £11,310.  They have savings interest of £6k which is all in the low earner's name.  If they opt to transfer the Marriage Allowance of £1,260 to the higher earner then the higher saves £252 in tax.  For the low earner the remaining tax allowance covers their salary.  The savings interest is covered by the £1000 allowance, leaving £5000 taxable but that is taxed at the starting rate of 0% for the first £5,000 and the £5,000 allowance is not reduced because the lower earner pays no tax.

Now say the low earner gets a pay rise to £12,570.  The MA could be rescinded so the lower earner pays no tax and the higher earner pays an extra £252, but does it matter.  If the MA remains then the low earner pays £252 and the higher earner saves this, as couple the effect is the same.  Or is it?

Because the low earner is now £1,260 over their tax allowance this also reduces the £5,000 starting allowance by £1,260, hence 20% tax is paid on this part of the savings interest.  Overall the low earner is paying 40% tax on their 1,260 pay rise.  As a couple they would be better to rescind the MA transfer.  Or better still put some of the savings into a cash ISA so that £1,260 interest is within an ISA, assuming they have spare ISA allowance of course.

It's a rather nasty trap and I suspect more likely to catch pensioners.  The new state pension is rising to over £11,540 so above what is left after MA is transferred.  It can still make tax sense to transfer the MA, the partner may have a company pensions as well so use the entire £1,260.  But when you add a lot of savings interest then it is not so clear cut. 


Comments

  • The basic answer, forgetting marrage allowance as i know nothing about that.
    £12,570 tax free earnings, pension or interest. So she will have £1,260 left for tax free interest plus £5,000 starter rate tax free interest and another £1,000 PSA tax free interest.
    A total of £7,260 tax frre from interest if needed.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,808
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    edited 29 November 2023 at 12:44PM
    For the low earner the remaining tax allowance covers their salary. The savings interest is covered by the £1000 allowance, leaving £5000 taxable but that is taxed at the starting rate of 0% for the first £5,000 and the £5,000 allowance is not reduced because the lower earner pays no tax.
    That's slightly wrong.

    All £6,000 is taxable and all £6,000 would be taxed.  In a specific order.

    First £5,000 taxed at 0% under the savings starter rate band.

    Next £1,000 taxed at 0% under the savings nil rate band (aka Personal Savings Allowance).

    There is no extra "allowance", they are 0% tax bands.  Doesn't make any difference to most people but it will to a few.
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