Tax on interest

whattochoose

Confusing isn't it? 

Dazed_and_C0nfused

horsewithnoname said:

Dazed_and_C0nfused said:

JGB1955 said:

whattochoose said:

I'm retired but have worked at elections (local and national) as a poll clerk the last few years.
I've found myself in the happy position of being in receipt of much higher interest from my savings as a result of improved rates being offered by banks, due to the rise in interest rates. 
However, even though I'm able to derive some benefit from the "tax free interest from savings" rule, because my overall income is less than £17570, what it does mean is that if I do the poll clerk work, I'll effectively be paying two lots of income tax, (1) on the actual income I'll earn and (2) that income will then be included as part of my overall income and be used when calculating how much extra tax I'll need to pay on the interest from savings that I earn.
So it means this year I wont be working as a poll clerk, because I feel effectively paying two lots of tax takes away my enthusiasm to do the job.
I'm not moaning about this, because I'm happy to be receiving higher rates of interest on my savings.
I suppose I'm just sharing.

You would still be netting 80% of any income over £18,570.

I think this a tricky one to get your head round, and I spectacularly failed at that a year or two back, but it can be an effective rate of 40%.

For example,

Earnings/pension of £12,570

Less PA £12,570 = £0 to be taxed.
Tax due on earnings/pension £0.00

Interest £6,000
£5,000 taxed at 0% (savings starter rate)
£1,000 taxed at 0% (savings nil rate)
Tax due on interest £0.00

Total tax bill £0

Same person does some election work and earns an extra £1,000 (as an employee).

Earnings/pension now £13,570
less PA £12,570 = £1,000 to be taxed
£1,000 x 20% (basic rate) = £200
Tax due on earnings £200

Interest £6,000
£4,000 taxed at 0% (savings starter rate)

£1,000 taxed at 0% (savings nil rate)
£1,000 taxed at 20% (savings basic rate)

Tax due on interest £200

Total tax bill £400

The extra £1,000 earnings has an effective tax rate of 40%

That’s nonsense. In your example you have paid 20% on the earned income above the personal allowance and 20 % on the interest above the £1000 savings allowance. That does not mean 40% tax

That is exactly where I previously came unstuck!

If you have additional income of £1,000 and as a result your income tax liability increases by £400 then most people would see that as 40% extra.

Yes it's two lots of 20% but it's still 40% in total compared to the extra income received.