Calculating tax on savings interest

kidwell25

I've completely confused myself regarding the order in which calculations take place and fear 
I may have made a costly rookie error in the tax year just finished.

I'm paid via PAYE and was making AVCs to my pension during the year so as to keep both my salary and savings income within the 20% tax bracket, but I'm now concerned I've not made quite enough contributions to achieve that.

I've ended up with £42,836 taxable income from my salary and £7748 taxable savings interest. That totals £50,584 which crosses into the higher tax threshold, but I'd assumed the tax free savings allowance was applied *before* that, and I'd therefore be ok, which I'm now starting to doubt.

Could someone confirm for me what rate(s) of tax I'll be paying on which parts of my savings interest?

 

Dazed_and_C0nfused

Assuming that that is all your taxable income and you haven't omitted any other pertinent facts (RAS pension contributions, Gift Aid, Scottish resident etc) then you will be entitled to a savings nil rate band of £500 (there is no "allowance" in the normal sense).

And you would normally be taxed like this,

Earnings £42,836 - PA £12,570 = £30,266
£30,266 x 20% (basic rate) = £6,053.20

Interest £7,748 all to be taxed
£500 x 0% (savings nil rate within basic rate band) = £0.00
£6,934 x 20% (savings basic rate) = £1,386.80
£314 x 40% (savings higher rate) = £125.60

Total tax payable = £7,565.60
NB.  You would also lose eligibility for Marriage Allowance in this situation.

But it might be beneficial to allocate some Personal Allowance to the interest, will come back to that shortly!

Dazed_and_C0nfused

Better outcome is possible with a different allocation of the Personal Allowance.

Earnings £42,836 - PA £5,136 = £37,700

£37,700 x 20% (basic rate) = £7,540

Interest £7,748 - PA £7,434 = £314
£314 x 0% (savings nil rate within higher rate band) = £0.00

Total tax payable = £7,540.00

NB. You would retain eligibility for Marriage Allowance in this situation.

amanda1024

Dazed_and_C0nfused said:

Better outcome is possible with a different allocation of the Personal Allowance.

Earnings £42,836 - PA £5,136 = £37,700

£37,700 x 20% (basic rate) = £7,540

Interest £7,748 - PA £7,434 = £314
£314 x 0% (savings nil rate within higher rate band) = £0.00

Total tax payable = £7,540.00

NB. You would retain eligibility for Marriage Allowance in this situation.

Do you get to choose how the Personal Allowance is allocated? Or will HMrC automatically allocate it to minimise or maximise tax?

Dazed_and_C0nfused

amanda1024 said:

Dazed_and_C0nfused said:

Better outcome is possible with a different allocation of the Personal Allowance.

Earnings £42,836 - PA £5,136 = £37,700

£37,700 x 20% (basic rate) = £7,540

Interest £7,748 - PA £7,434 = £314
£314 x 0% (savings nil rate within higher rate band) = £0.00

Total tax payable = £7,540.00

NB. You would retain eligibility for Marriage Allowance in this situation.

Do you get to choose how the Personal Allowance is allocated? Or will HMrC automatically allocate it to minimise or maximise tax?

They should allocate it in whichever way gives the lowest liability.

But it can get complicated and they have some scenarios their software struggles with!

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://assets.publishing.service.gov.uk/media/65dc6b78964ca80011c6e8d0/2023-24-Exclusion-Individual-v0.1a__1_.odt&ved=2ahUKEwjK9qnHv9CFAxU3VKQEHdyQBm0QFnoECCwQAQ&usg=AOvVaw2uNPSnz6WFEc9RuG-GBS6q

ColdIron

amanda1024 said:

Dazed_and_C0nfused said:

Better outcome is possible with a different allocation of the Personal Allowance.

Earnings £42,836 - PA £5,136 = £37,700

£37,700 x 20% (basic rate) = £7,540

Interest £7,748 - PA £7,434 = £314
£314 x 0% (savings nil rate within higher rate band) = £0.00

Total tax payable = £7,540.00

NB. You would retain eligibility for Marriage Allowance in this situation.

Do you get to choose how the Personal Allowance is allocated? Or will HMrC automatically allocate it to minimise or maximise tax?

Yes and yes

I do self assessment and on a couple of occasions when my pension income was less than my Personal Allowance and my savings interest was within the Starting Rate for Savings and Personal Savings Allowance, they tucked away some of my dividends in the Personal Allowance rather than allocating it uselessly to interest. All automatic and saved me nearly a hundred quid

EthicsGradient

Dazed_and_C0nfused said:

Assuming that that is all your taxable income and you haven't omitted any other pertinent facts (RAS pension contributions, Gift Aid, Scottish resident etc) then you will be entitled to a savings nil rate band of £500 (there is no "allowance" in the normal sense).

And you would normally be taxed like this,

Earnings £42,836 - PA £12,570 = £30,266
£30,266 x 20% (basic rate) = £6,053.20

Interest £7,748 all to be taxed
£500 x 0% (savings nil rate within basic rate band) = £0.00
£6,934 x 20% (savings basic rate) = £1,386.80
£314 x 40% (savings higher rate) = £125.60

Total tax payable = £7,565.60
NB.  You would also lose eligibility for Marriage Allowance in this situation.

But it might be beneficial to allocate some Personal Allowance to the interest, will come back to that shortly!

I think that, given those 2 figures and nothing else, they'd allocate things a little more advantageous still:

42836 earnings

7748 interest
total 50584, 314 above 12570+37700=50270

12570 PA

30266 of earnings @20%=6053.20 in tax

500 of interest is covered by the PSA @0%, of which :

314 would have been @40%

186 would have been @20%

remaining 7748-500=7248 is taxed @20%=1449.60 in tax

total tax =£7,502.80

But you mention Gift Aid. First, check if you have made any Gift Aid payments during 2023-24 (you might well have sponsored someone, ticked the "apply Gift Aid" box, and then not written it down for calculation). Then if doing self-assessment, you get the choice of saying "I'd like Gift Aid donations made before I submitted this assessment to be carried back into 2023-24". And this makes the £37,700 basic rate band larger by the gross amount of your Gift Aid donation.

Self Assessment tax returns normally only include items from the previous tax year. But for Gift Aid, you can also claim tax relief on donations made in the current tax year (up to the date the return is sent) to either get the tax relief sooner, or if you will not be paying higher rate tax in the current year but have paid it in the previous year.

How to make the most of your charitable giving in your self-assessment: CAF shares advice - UK Fundraising

This allows you to make a final adjustment to hang on to the £1000 PSA (you don't get to apply  it again in your 2024-45 return, of course). I'd hope there's some way for PAYE taxpayers to get this too, but I confess I've no idea how you get HMRC to apply it - phone them up???

If you can get them to take it into account, and donate at least a gross £314 (net £251.20 - round it up to £252, ie gross £315), then

total 50584, 1 below 12570+37700+315=50585

12570 PA

30266 of earnings @20%=6053.20 in tax

1000 of interest is covered by the PSA @0%
remaining 7748-1000=6748 is taxed @20%=1349.60 in tax
total tax=£7,402.80

So you could pay £100 less tax, but donate £252. So effectively you pay a net £152 more, but your charity receives £315. Worth considering.

Dazed_and_C0nfused

I think that, given those 2 figures and nothing else, they'd allocate things a little more advantageous still:
total tax =£7,502.80

42836 earnings
7748 interest
total 50584, 314 above 12570+37700=50270
12570 PA
30266 of earnings @20%=6053.20 in tax
500 of interest is covered by the PSA @0%, of which :
314 would have been @40%
186 would have been @20%
remaining 7748-500=7248 is taxed @20%=1449.60 in tax

Not sure that is actually possible.

AIUI once the Personal Allowance has been allocated the remaining income is taxed in a particular order and, ignoring the savings state rate band which isn't relevant here, the nil rate band comes first once you get to taxing the interest.

So you have used more basic rate band (£38,014) than exists (£37,700).

EthicsGradient

I think it's correct - it was the way we use to work out the figures the HMRC online calculator gave here: Savings interest tax calculation confusion — MoneySavingExpert Forum

Basic rate band used = 30266 + 186 + 7748 = 37700. The other £314 is what HMRC lists as "higher rate band at nil rate" in the screen capture friolento posted in that thread.

kidwell25

Thanks for all your responses. I don't do a self-assessment so I'm not sure whether the variations on how the personal allowance could be split are applicable in this case? [NB Not married, so marriage allowance not relevant]. Looking at my payslips, I apparently paid £6404 tax in 23-24. I think that's more than the 20% on my earnings because my tax code changed in November so as to recoup unpaid tax on interest from 22-23. I was mainly asking this question so as to ensure I get my methodology correct for 24-25 - having clearly failed this year!

As the tax on my salary has already been taken, is this original calculation from dazed_and_C0nfsed the one that HMRC will apply (through subsequently changing my tax code accordingly)?

Interest £7,748 all to be taxed
£500 x 0% (savings nil rate within basic rate band) = £0.00
£6,934 x 20% (savings basic rate) = £1,386.80
£314 x 40% (savings higher rate) = £125.60

ColdIron

kidwell25 said:

Thanks for all your responses. I don't do a self-assessment so I'm not sure whether the variations on how the personal allowance could be split are applicable in this case?

It doesn't really matter that you don't do SA, it happens automatically, I only mention it as you can easily see how they calculate it and how it has been apportioned. It also allows you to do 'what ifs' by varying your figures before you submit it to see how it falls out, handy for planning