Personal savings allowance and staying out of higher rate tax band

housebuyer143

I hope someone can help. My husband got a payrise putting him £2k into the higher rate threshold. He has decided to put money into his pension to bring it down to meet the top of the banding. 
He however also earns £1000k a year in interest from savings. How does this affect him? Does the £1k count as income and therefore push him into the higher rate again? Thus reducing his allowance to £500? If this is the case, should be put another £1k a year into the pension?
What we are trying to achieve is to stay under the HR threshold and keep the £1k allowance for savings interest. Can someone advise how to best do this please?

ColdIron

Earnings and savings interest (amongst other things) count as income so he will need to make a gross pension contribution equal to the excess

Does he use his full ISA allowance each year?

housebuyer143

ColdIron said:

Earnings and savings interest (amongst other things) count as income so he will need to make a gross pension contribution equal to the excess

Does he use his full ISA allowance each year?

Thanks, I'll get let him know to add some more to the pension. He has been using the ISA allowance, but he put a money into fixed savings assuming he had to £1k limit tax free and it's stuck there paying annual interest for a few more years. 

ColdIron

Do your numbers carefully as even £1 over could reduce his Personal Savings Allowance to £500. Perhaps err on the side of caution, his older self will thank him for it

Dazed_and_C0nfused

ColdIron said:

Do your numbers carefully as even £1 over could reduce his Personal Savings Allowance to £500. Perhaps err on the side of caution, his older self will thank him for it

This is even more important where Marriage Allowance is involved.

£1 of interest taxed at 40% would mean he loses eligibility for Marriage Allowance and could easily a few hundred pounds as a result.

housebuyer143

Dazed_and_C0nfused said:

ColdIron said:

Do your numbers carefully as even £1 over could reduce his Personal Savings Allowance to £500. Perhaps err on the side of caution, his older self will thank him for it

This is even more important where Marriage Allowance is involved.

£1 of interest taxed at 40% would mean he loses eligibility for Marriage Allowance and could easily a few hundred pounds as a result.

Is this right? You can't transfer marriage allowance if he's in the higher rate of tax??

ColdIron

Yup

Who can apply

You can benefit from Marriage Allowance if all the following apply:

• you’re married or in a civil partnership
• you do not pay Income Tax or your income is below your Personal Allowance (usually £12,570)
• your partner pays Income Tax at the basic rate, which usually means their income is between £12,571 and £50,270 before they receive Marriage Allowance

https://www.gov.uk/marriage-allowance

housebuyer143

I'm glad for the payrise but so much to consider now 🙄 appreciate all your help.

ColdIron

Yes it's well worth the effort if you can. Kindof reinforces the Laffer curve

housebuyer143

@Dazed_and_C0nfused @Col@ColdIron

Just to make sure I have this right then. If he can reduce his earnings after pension contributions down to £49k, that will allow him £1k savings interest and he will still be under the HR threshold assuming he doesn't go over the savings allowance or earn anything else?

Dazed_and_C0nfused

housebuyer143 said:

@Dazed_and_C0nfused @Col@ColdIron

Just to make sure I have this right then. If he can reduce his earnings after pension contributions down to £49k, that will allow him £1k savings interest and he will still be under the HR threshold assuming he doesn't go over the savings allowance or earn anything else?

That would only work if he contributed using the net pay method or he sacrificed some salary (in return for extra employer contributions).  And not all employers use those methods.

Another option is to make relief at source contributions to a SIPP or personal pension.  These do not reduce taxable income but they do increase his basic rate band and therefore can have the same benefit.

He has to include all taxable income, even that taxed at 0%, when initially working out of he is a higher rate payer and whether he will then get £500 or £1,000 interest taxed at 0%.