Personal Savings allowance and earned income

Pat38493

Quick technical question.

If I want to stay within the 20% marginal tax rate and therefore get £1000 of personal savings allowance, do I need to keep my earned income below £49270 or below £50270?

In other words if I earned 50270, plus £999 of savings interest, does that mean I lost my £1000 allowance and pay 40% tax on £500 because the £1000 is added to the earnings first?

ColdIron

For most people with a standard Personal Allowance your income must be £50,270 or less. That income includes savings interest so not just earned income or pension

https://www.gov.uk/income-tax-rates

EthicsGradient

Note that "40270" is not a figure that comes into anyone's calculations, really - that is 50,270 minus 10,000. I suspect you were thinking of "minus 1,000".  But as ColdIron says, it's your total income that counts, and should be below £50,270 (but note that pension contributions that you make, and Gift Aid donations you make, increase the level above 50,270, which might be useful to you).

Pat38493

EthicsGradient said:

Note that "40270" is not a figure that comes into anyone's calculations, really - that is 50,270 minus 10,000. I suspect you were thinking of "minus 1,000".  But as ColdIron says, it's your total income that counts, and should be below £50,270 (but note that pension contributions that you make, and Gift Aid donations you make, increase the level above 50,270, which might be useful to you).

Sorry yes I have fixed the post - it's basically a cliff edge where by having £1 more of savings interest you could lost half your allowance I guess.

Pat38493

Sorry to resurrect this old thread but I only just realised the worst case implications here.

If I earned £49270 in the year and then earned £1000 in savings interest, and then my boss gave me a bonus of one pound, I would effectively pay a marginal tax rate of 10,000% on that one pound as I would suddenly pay 20% tax on £500 of my savings interest.

kimwp

Pat38493 said:

Sorry to resurrect this old thread but I only just realised the worst case implications here.

If I earned £49270 in the year and then earned £1000 in savings interest, and then my boss gave me a bonus of one pound, I would effectively pay a marginal tax rate of 10,000% on that one pound as I would suddenly pay 20% tax on £500 of my savings interest.

Yep, although you'd suddenly pay 40% on savings interest over £500, not 20%. 

 And dividends count towards it, maybe other things (I'm currently trying to figure out some of this myself)

Edit - I thought it was as above, but I'm not sure any more.

Pat38493

kimwp said:

Pat38493 said:

Sorry to resurrect this old thread but I only just realised the worst case implications here.

If I earned £49270 in the year and then earned £1000 in savings interest, and then my boss gave me a bonus of one pound, I would effectively pay a marginal tax rate of 10,000% on that one pound as I would suddenly pay 20% tax on £500 of my savings interest.

Yep, although you'd suddenly pay 40% on savings interest over £500, not 20%. 

 And dividends count towards it, maybe other things (I'm currently trying to figure out some of this myself)

Are you sure because I was modeeling this scenario in a cash flow planning software, and it seemed like it was only charging 20% tax on the savings interest?

The total of earned income, plus savings interest, in this example is £50271, so it would be pretty bad to then charge 40% tax on the £500 of savings interest that suddenly comes into scope of tax?

intalex

Given the £500 is included in the £50271 then £499 at 20% and £1 at 40% if I got my understanding right...

Edit: Given the £500 "newly" taxable is included...

zagfles

In that scenario the cliff edge is easily avoided by making a £1 gift aid donation to your favourite charity, and if you do a tax return it can even be in the following tax year, as you can backdate gift aid donations made in the period between the end of the tax year and when you submit the tax return. 

EthicsGradient

I think the effective marginal rate of tax, after the sudden leap due to the decrease in PSA, is still 20% at first, due to the way the PSA is "overlaid" on your taxable income to your advantage. Consider the scenarios:

49270 + 1000:
total is £50270, so £1,000 PSA
£12,570 covered by PA; £37,700 in basic rate band (all the £36,700 remaining earnings, and all the £1,000 savings). £1000 of savings interest is zero rated in the PSA
tax = 36,700 * 20% = £7,340

49271 + 1000:
total is £50271, so £500 PSA
£12,570 covered by PA; £36,701 of earnings in basic rate band, and £999 of savings . £1 of savings lies in the higher rate band.
£500 of savings interest is zero rated in the PSA; this covers the £1 in the higher rate, and £499 in the basic rate.
tax = £36,701 * 20% + £500 * 20% = £7,440.20

49272 + 1000:
total is £50272, so £500 PSA
£12,570 covered by PA; £36,702 of earnings in basic rate band, and £998 of savings . £2 of savings lies in the higher rate band.
£500 of savings interest is zero rated in the PSA; this covers the £2 in the higher rate, and £498 in the basic rate.
tax = £36,702 * 20% + £500 * 20% = £7,440.40

ie an effective rate of 20% on the "bonus", still.

and so on, until the earnings reach £49,270 + £500, at which point the PSA will all be used for savings interest in the higher rate band; after that, you'll pay 40% on each additional pound of income.

Pat38493

zagfles said:

In that scenario the cliff edge is easily avoided by making a £1 gift aid donation to your favourite charity, and if you do a tax return it can even be in the following tax year, as you can backdate gift aid donations made in the period between the end of the tax year and when you submit the tax return. 

Thanks I did not realise that you can backdate gift aid donations, but how do you actually do that?  Can you just arbitrarily apply it to the prior tax year even if the date on the transacction is in the current tax year?

EthicsGradient said:

I think the effective marginal rate of tax, after the sudden leap due to the decrease in PSA, is still 20% at first, due to the way the PSA is "overlaid" on your taxable income to your advantage. Consider the scenarios:

49270 + 1000:
total is £50270, so £1,000 PSA
£12,570 covered by PA; £37,700 in basic rate band (all the £36,700 remaining earnings, and all the £1,000 savings). £1000 of savings interest is zero rated in the PSA
tax = 36,700 * 20% = £7,340

49271 + 1000:
total is £50271, so £500 PSA
£12,570 covered by PA; £36,701 of earnings in basic rate band, and £999 of savings . £1 of savings lies in the higher rate band.
£500 of savings interest is zero rated in the PSA; this covers the £1 in the higher rate, and £499 in the basic rate.
tax = £36,701 * 20% + £500 * 20% = £7,440.20

49272 + 1000:
total is £50272, so £500 PSA
£12,570 covered by PA; £36,702 of earnings in basic rate band, and £998 of savings . £2 of savings lies in the higher rate band.
£500 of savings interest is zero rated in the PSA; this covers the £2 in the higher rate, and £498 in the basic rate.
tax = £36,702 * 20% + £500 * 20% = £7,440.40

ie an effective rate of 20% on the "bonus", still.

and so on, until the earnings reach £49,270 + £500, at which point the PSA will all be used for savings interest in the higher rate band; after that, you'll pay 40% on each additional pound of income.

I'm not sure if I'm following you - even with your calculations there is an additional £100.20 of income tax, based on only one pound extra coming in.  Therefore if you calculate it only on the £1 extra, the marginal rate on that £1 would be 10000%