Tax on interest

lee78

If I earn £50000 and I have £3500 in interest will that mean I pay 40% on it or just 20%

Dazed_and_C0nfused

lee78 said:

If I earn £50000 and I have £3500 in interest will that mean I pay 40% on it or just 20%

If that is all of your taxable income then you will pay 0% on the first £500 (which uses up the last little bit of your basic rate band) and 40% on the remaining £3000.

So total tax due on the interest would be £1,200 

AmityNeon

HMRC would/should automatically apply allowances in the way that results in the greatest reduction in income tax liability (as per s25(2) ITA 2007 as referenced in an HMRC internal manual example). This prevents nil-rate bands from using up any of the basic rate band.

In the case of £50,000 taxable earnings and £3,500 taxable savings interest:

• £3,000 of Personal Allowance can be allocated to interest, and the remaining (first) £500 is taxed at 0%; no tax liability on savings interest.
• That leaves £9,570 of Personal Allowance allocable to earnings = £40,430 taxable.
  • £37,700 (the full basic rate band) @ 20% = £7,540
  • £2,730 @ 40% = £1,092
  • Total tax payable = £8,632 (compared to £8,686 when £270 of the basic rate band is swallowed by the nil-rate band)

lee78

Oh ok I thought that because I was still in the 20% bracket that I would have the £1000 allowance , so basically they count all interest as part of total income 
thanks

MDMD

lee78 said:

Oh ok I thought that because I was still in the 20% bracket that I would have the £1000 allowance , so basically they count all interest as part of total income 
thanks

They could all taxable interest - so would exclude anything in an ISA for example.

jimjames

lee78 said:

Oh ok I thought that because I was still in the 20% bracket that I would have the £1000 allowance , so basically they count all interest as part of total income 
thanks

Yes so if you're doing salary sacrifice for example to get into a lower tax band for the £1000 allowance you also need to take account of other income that will be added to salary to determine the banding.

eskbanker

lee78 said:

Oh ok I thought that because I was still in the 20% bracket that I would have the £1000 allowance , so basically they count all interest as part of total income 
thanks

Yes, the Personal Savings Allowance is a misnomer, as it isn't actually an 'allowance' at all but a nil-rate band, i.e. all (non-ISA) interest is taxable income but the bottom slice is taxed at 0% rather than being 'tax-free' as such, a distinction that may seem arbitrary and pedantic but actually makes a difference for those close to band thresholds....