# How to work out the tax on interest over your PSA for a higher rate payer?

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I'm trying to research what to do with investing in some savings accounts and not clear on the situation for a higher rate tax payer, I get there is a £500 allowance and anything above this is 40% but I'm not sure if this is on all the interest or the amount upto the higher rate threshold.

Could someone help with an example please, if you're earning 53k and received 12k interest then 53,000 - 12,570 = 40,430 taxable income. Now how is the 12k taken into account with this to work out what you would owe?
Would it 40% on 11,500 after the 500 allowance is taken or is there an example where it would be part 40% and then part 20% once you go under the 50,271 threshold?

Just trying to understand the way to calculate it. Thanks
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Hi,
similar query HERE might help explain,
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edited 25 December 2023 at 3:30PM
Excuse me any xmas miscalculations
The first £12,570 of your earnings and interest is tax free. This leaves you with your basic rate band (£37,700) taxed at 20% taking you to the HR threshold of £50,270. As you earn more than the HR threshold your case is simple. Earnings above this are taxed at 40% as is all your interest except the first £500 PSA which is taxed at 0%
£7,540 basic rate tax on earnings
£1,092 higher rate tax on earnings
£4,600 higher rate tax on savings
Total £13,232
is there an example where it would be part 40% and then part 20% once you go under the 50,271 threshold?
Yes but not in your example where your earnings are greater than the HR threshold. If it were less then it could be split
Edit: I think the mistake you have made is this:
if you're earning 53k and received 12k interest then 53,000 - 12,570 = 40,430 taxable income
By knocking off the PA from your earnings you think your taxable earnings (£40,430) are below the HR threshold and therefore the interest could be split but that's not how it works (and by the by interest is taxable income but that's not relevant to your example)
Personal Allowance (£12,570) + Basic Rate band (£37,770) = Higher Rate threshold (£50,270)
£53,000 > £50,270
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edited 25 December 2023 at 6:19PM
Thanks @ColdIron that was useful to confirm, I used the other post to work it out then compared against your answer and got the same number. Good to know that some of the interest can be taxed at 20% if you're taxable income is below the higher rate threshold. Unfortunately it also means if you're earning at a certain point in the higher rate bracket then all savings interest outside the personal savings allowance will be at the higher rate.

Makes me wonder if it's better to invest and pay a lower rate with dividend tax.
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edited 25 December 2023 at 6:24PM
The other thing you can consider is to contribute to a pension in order to either reduce your earned income or increase your basic rate threshold.
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edited 25 December 2023 at 6:46PM
It's certainly an option if you have sufficient cash and accept the additional risk that it entails. You also have additional dividend and CGT 'allowances' you can put into play
Part of my income comes from dividends in a GIA. I used to Bed & ISA this annually but have stopped doing that now and prefer to tuck my cash away into my investment ISA
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masonic said:
The other thing you can consider is to contribute to a pension in order to either reduce your earned income or increase your basic rate threshold.
Does that only work if you're doing salary sacrifice or if its the net pay method?
With relief at source, your earned income would remain the same, have I understood that correctly?
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ColdIron said:
It's certainly an option if you have sufficient cash and accept the additional risk that it entails. You also have additional dividend and CGT 'allowances' you can put into play
Part of my income comes from dividends in a GIA. I used to Bed & ISA this annually but have stopped doing that now and prefer to tuck my cash away into my investment ISA
What are these extra allowances? I am thinking of doing a similar thing and putting part of my investments in a GIA and have some dividend income from there, there is risk but the tax is less by roughly 7%.

I didn't follow your point about why you've stopped Bed & ISA, isn't that a good approach, but you're still putting your money into an investment ISA, so you're still adding money but directly?
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edited 26 December 2023 at 5:19PM
isayhello said:
masonic said:
The other thing you can consider is to contribute to a pension in order to either reduce your earned income or increase your basic rate threshold.
Does that only work if you're doing salary sacrifice or if its the net pay method?
With relief at source, your earned income would remain the same, have I understood that correctly?
Salary sacrifice would reduce your earned income, whereas net pay would increase your basic rate band (earned income would stay the same). You would need to declare the net pay contributions in your tax return to benefit from this.
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isayhello said:
ColdIron said:
It's certainly an option if you have sufficient cash and accept the additional risk that it entails. You also have additional dividend and CGT 'allowances' you can put into play
Part of my income comes from dividends in a GIA. I used to Bed & ISA this annually but have stopped doing that now and prefer to tuck my cash away into my investment ISA
What are these extra allowances? I am thinking of doing a similar thing and putting part of my investments in a GIA and have some dividend income from there, there is risk but the tax is less by roughly 7%.
For a basic rate tax payer the tax on interest is 20%, the tax on dividends is 8.75% so 11.25% less
The 'allowance' for dividends used to be relatively generous but it's now £1,000 reducing to £500 next April. It's not a lot but more than you have now. It's not tax free as such but the rate of tax is 0%
If your investments grow and you sell them (as you would with Bed & ISA) your profit, or gain, is taxable at 10% for a basic rate tax payer. This is Capital Gains Tax. Again there is an 'allowance', the Annual Exempt amount. The first £6,000 is not taxable. This decreases to £3,000 next year. Again not a huge amount but more than you have with cash alone
I didn't follow your point about why you've stopped Bed & ISA, isn't that a good approach, but you're still putting your money into an investment ISA, so you're still adding money but directly?
You were considering moving cash into investments to take advantage of the lower tax. With Bed & ISA I was sheltering my existing taxable investments with no change to cash, now I am sheltering cash and preserving investments. It achieves much the same thing
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For a basic rate tax payer the tax on interest is 20%, the tax on dividends is 8.75% so 11.25% less

You were considering moving cash into investments to take advantage of the lower tax. With Bed & ISA I was sheltering my existing taxable investments with no change to cash, now I am sheltering cash and preserving investments. It achieves much the same thing
At the higher rate it does become closer to 7% I think but still a worthwhile saving if I'm happy to take the risk with investments. I feel this is a good approach especially if savings rates drop.

Ah ok, so you mean now you'd move your cash/savings accounts money into an ISA and leave the GIA investments alone?

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