Tax on Interest if self-employed income is below threshold

andrewilley

What is the tax situation if your net self-employed income is well below your personal tax threshold, but savings interest is above the £1,000 plus the £5,000 'starting rate' additional allowance for savings?

For example, a hypothetical annual situation like:
Net Self-Employed Income: £9,000
Savings Interest: £8,000
Personal Allowance: £13,830 (£12,570 + £1,260 transferred marriage allowance)

Would there be any tax to pay in the above circumstances? And if so, would paying a lump sum of a few thousand pounds into a private pension before the end of the tax year make a difference?

Thanks,

Andre

eskbanker

If your total taxable income is £17K, with non-savings component below the personal tax allowance (even without marriage allowance, which doesn't literally extend the PTA itself), then there'll be no tax due, as the savings interest uses up the rest of the PTA before depleting the other two nil rate bands.

andrewilley

Excellent, thank you for the very helpful reply. So basically there are two main rules at play here:

For income tax to be nil from the simple self-employed work point of view, net earned income needs to be lower than £13,830 (i.e.£12,570 personal allowance plus £1,260 transferred marriage allowance). That bit was fairly clear anyway, and is already the case.

However from the extra savings interest point of view, the marriage allowance does not count so as long as net income is already lower than £12,570, the total of net earned income plus savings interest needs to be below £18,570 (i.e. £12,570 personal income allowance, plus £1,000 'free' interest and the £5,000 'starting rate' allowance).

And just for future reference, any payments made into a personal pension scheme will effectively reduce the net earned income figure for the purposes of tax calculations - but does that apply to the 'plus-interest' calculations too, or are they based on simple earned income only?

Andre

Dazed_and_C0nfused

You should completely ignore Marriage Allowance and personal pension contributions.

Marriage Allowance simply entitled you to a tax deduction of £252.  If does not have any impact on your tax bands and you are taxed on anything (taxable) above £12,570.

Personal pension contributions will be made using the RAS method and they never reduce your taxable income.  They increase your basic rate band and that isn't a factor unless you are a higher rate payer or pay intermediate rate tax as a Scottish taxpayer.