Tax on interest (again!)

Ciprico

I know this subject has been done to death - but I still find it confusing.

Assuming earnings are:

12570   tax free band
 1000    PSA allowance
 5000    Starting rate for savings

So if I earned 18570, there is no tax to pay

If I earnt one pound more, does the "Starting rate for savings" disappear...?

12570   tax free band
        1   taxable income at 20%
 1000    PSA allowance
 5000    Starting rate for savings ??

Meaning that the extra £1 cost would cost me 20% * 5k = £1000 in tax

Would be extra £1 do the same damage if it was from salary or interest...?

Thanks for any guidance....

gravel_2

https://www.gov.uk/apply-tax-free-interest-on-savings

eskbanker

The extra £1 would give rise to an additional tax liability of 20p.

ColdIron

Ciprico said:

If I earnt one pound more, does the "Starting rate for savings" disappear...?

No, assuming that it was from earned income it just reduces the amount of SRS available to you by £1 to £4,999

That pound earned would be taxed (as it is not savings) and so would the pound of savings displaced by it (from SRS and PSA)

Edit: Re reading your post it's not clear what you mean by earned (or earnt). If it was all earned income or pensions as opposed to savings then the SRS would not be available to you and you have no savings interest so the PSA would be unused. If it was all savings then that pound would have no effect on SRS or PSA, it would just be taxed in the usual manner as it's not covered by any 'allowance'

In my answer above I have assumed that the first £12,570 is earned income or pension and the rest savings due to the placement of your pound

PS The order that the various bands are applied is Personal Allowance then the Starting rate for Savings and then finally the Personal Savings Allowance

EthicsGradient

For any advice, you need to be clear about, at the starting point, what is earned income (salary, pension, rental income) and what is from interest (including bonds and funds that consist mostly of bonds).

Dazed_and_C0nfused

Ciprico said:

I know this subject has been done to death - but I still find it confusing.

Assuming earnings are:

12570   tax free band
 1000    PSA allowance
 5000    Starting rate for savings

So if I earned 18570, there is no tax to pay

If I earnt one pound more, does the "Starting rate for savings" disappear...?

12570   tax free band
        1   taxable income at 20%
 1000    PSA allowance
 5000    Starting rate for savings ??

Meaning that the extra £1 cost would cost me 20% * 5k = £1000 in tax

Would be extra £1 do the same damage if it was from salary or interest...?

Thanks for any guidance....

If you had "earnings" of £18,570 you wouldn't have any savings starter rate band available, just the £1,000 savings nil rate band.

And you would have basic rate tax of £1,200 to pay on the £18,570.

Each £1 of non savings non dividend income (taxable earnings, self employment profits, pension income, rental income etc) above your Personal Allowance reduces the savings starter rate band by £1. 

So by the time you have £5,000 above the Personal Allowance the whole of the savings starter rate band had been lost.

Ciprico

Thanks for the comments. I'm soon to go from accumulation to drawdown and wanted to check optimal options. 

Seems most efficient way is to tally up all interest to be received, and then draw pension to bring total to £18570 providing interest is greater than 5k

EthicsGradient

Ciprico said:

Thanks for the comments. I'm soon to go from accumulation to drawdown and wanted to check optimal options. 

Seems most efficient way is to tally up all interest to be received, and then draw pension to bring total to £18570 providing interest is greater than 5k

I think that should be "...greater than 6k" - if you draw a pension more than £12,570, the amount above £12,570 will be taxed at 20%, and it will also start to cut the £5,000 band.

(I suppose this depends on what you mean by "most efficient" - if your interest is between £5000 and £6000, and you draw enough pension to have a total income of £18570, you will pay some tax. If you want to pay no tax at all, then jus draw £12,570 in this situation, and have a total income between £17570 and £18570. If it's imperative to have the £18570 gross income, however, you'll have to pay that bit of tax in this situation.)

xylophone

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-savings-income/personal-savings-allowance

Pension income is taxable in the same way as earned income.

Ciprico

So if pension was 12,570
And interest was.  20,000

You get full basic rate tax relief on 12570 and still get 6k interest relief, only the interest over 17570 is taxed at br (so does not reduce the 5k starting rate, whereas income over 12750 does reduce 5k savings starting rate...

Basicly interest may get taxed but cannot  remove the 6k tax free interest as interest is not earnings, and only earnings can can reduce the 6k savings rate.

...and pension counts as earnings....

Dazed_and_C0nfused

Ciprico said:

So if pension was 12,570
And interest was.  20,000

You get full basic rate tax relief on 12570 and still get 6k interest relief, only the interest over 17570 is taxed at br (so does not reduce the 5k starting rate, whereas income over 12750 does reduce 5k savings starting rate...

Basicly interest may get taxed but cannot  remove the 6k tax free interest as interest is not earnings, and only earnings can can reduce the 6k savings rate.

...and pension counts as earnings....

Not quite.

Any (taxable) non savings non dividend income counts when calculating the savings starter rate band.

So if you had say £14,300 in earnings and pension income your savings starter rate band would only be £3,270.  And you would also have the £1,000 savings nil rate band (aka Personal Savings Allowance).

So if you also had £20k in interest this would all be taxed, like this,

£3,270 x 0% (savings starter rate)
£1,000 x 0% (savings nil rate)
£15,730 x 20% (savings basic rate)

The example above is for someone who hasn't applied for Marriage Allowance.