Personal Savings allowance and earned income

EthicsGradient

Pat38493 said:

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%

Yes, the marginal rate on the first £1 is absurdly high at 10000% (hence "after the sudden leap due to the decrease in PSA"), but after that, the marginal rate is at first 20% on the subsequent increases in earnings, not the 40% one poster said.

For backdating Gift Aid when doing self assessment, there are boxes in the form that say "please apply this gift aid in the current unfinished year to the previous tax year" (and "I applied some gift aid to a previous year, so I can't claim it again", which you then say in the next year). If HMRC is working out your tax, I suppose you have to get in touch with them to ask for it to be treated this way.

kimwp

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

https://www.which.co.uk/money/tax/income-tax/income-tax-on-savings-and-investments/tax-on-savings-aC76e6j35O1H

intalex

kimwp said:

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

Hence 40% on the £1 in the example above?

zagfles

Pat38493 said:

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?

Yes, the gift aid section has boxes where you can do exactly that. Google SA150 (SA notes) page 11

zagfles

intalex said:

kimwp said:

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

Hence 40% on the £1 in the example above?

No, 10000% as above. Because not only is the extra £1 taxed at 40% but an extra £500 is taxed at 20% because that extra £1 has caused the PSA to be chopped from £1000 to £500. 

kimwp

intalex said:

kimwp said:

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

Hence 40% on the £1 in the example above?

Looks like it, according to Martin's blog. 

https://blog.moneysavingexpert.com/2016/02/the-new-personal-savings-allowance-means-some-people-will-be-better-off-earning-less-interest/?_gl=1*cdflyd*FPAU*MTM1MDAyNDgyOS4xNzM0MzY1NDUy*_ga*Mzk5Nzk0MTcyLjE2MzI4NDE1NzI.*_ga_X74CWQS9F0*MTczNjc4NzE1Ny4zMjQ1LjEuMTczNjc4OTkxNy4wLjAuMTU1NDQ5MTUxNw..

intalex

I now (belatedly) get EthicsGradient's post above with examples, which makes 100% sense, I'd overlooked the fact that there's still the remaining £500 PSA which gets applied at the "top end" first so at £50,271 nothing gets taxed at 40%... only above £50,770 (of which above £500 savings interest) does anything get taxed at 40%.

Pat38493

kimwp said:

intalex said:

kimwp said:

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

Hence 40% on the £1 in the example above?

Looks like it, according to Martin's blog. 

https://blog.moneysavingexpert.com/2016/02/the-new-personal-savings-allowance-means-some-people-will-be-better-off-earning-less-interest/?_gl=1*cdflyd*FPAU*MTM1MDAyNDgyOS4xNzM0MzY1NDUy*_ga*Mzk5Nzk0MTcyLjE2MzI4NDE1NzI.*_ga_X74CWQS9F0*MTczNjc4NzE1Ny4zMjQ1LjEuMTczNjc4OTkxNy4wLjAuMTU1NDQ5MTUxNw..

In the end you just have to look at the total tax paid in each example - you only "earned" an extra £1, but the total tax paid went up by just over £100.  i.e. if you were aware of this you would be crazy to trigger this scenario.

Probably something similar happens to some people and they don't even realise.  I was paying 60% marginal rate on some of my income for several years until I found out what was going on - didn't even notice at first as I wasn't paying enough attention.

TheSpectator

The ship has sailed on thr carry back of 24/25 Gift Aid contributions to 23/24

EthicsGradient

kimwp said:

intalex said:

kimwp said:

The gov website is not very clear, but this which article spells it out:

Can interest from savings push me into a higher tax bracket?

Be aware that savings income within the allowance still counts towards your income as a whole, and could push you into a higher tax bracket if you're already near the threshold. If this happens, it may affect the level of personal savings allowance you're entitled to, and the rate of tax due on any savings income that exceeds it.

So, if you are a basic-rate taxpayer and you earn enough interest from savings to be pushed into the higher-rate tax threshold, you'll then only be entitled to a £500 personal savings allowance, and will pay 40% tax on the remainder that's in the higher tax bracket.

Hence 40% on the £1 in the example above?

Looks like it, according to Martin's blog. 

https://blog.moneysavingexpert.com/2016/02/the-new-personal-savings-allowance-means-some-people-will-be-better-off-earning-less-interest/?_gl=1*cdflyd*FPAU*MTM1MDAyNDgyOS4xNzM0MzY1NDUy*_ga*Mzk5Nzk0MTcyLjE2MzI4NDE1NzI.*_ga_X74CWQS9F0*MTczNjc4NzE1Ny4zMjQ1LjEuMTczNjc4OTkxNy4wLjAuMTU1NDQ5MTUxNw..

The HMRC forum confirmed, last year, that, after the jump in tax paid due to the decreased PSA, the marginal rate is 20%:

"Example 1

Taxable income excluding savings interest: £49,320

Taxable interest from savings : £950

Total taxable income : £50,270

...
Taxable amount after PSA applied = £36,750

Tax @ 20% = £7,350"

Example 2

Taxable income excluding savings interest: £49,321

Taxable interest from savings : £950

Total taxable income : £50,271

...
Taxable amount after PSA = £37,201
Tax @ 20% = £7,440.20"

"Yes the examples woulld be correct." 

Note the extra £1 in earned income, and the appearance of the ".20" in tax paid, ie 20%. Since the PSA is subtracted from the savings interest, the taxable amount left is under the £37,700 basic rate band, so it's all at 20%.