Taxable Income

chrisamyphillip

I have had a few email threads with HMRC regarding interest on pension drawdown and interest on savings.
HMRC don't seem to give a simple yes/no answer but before I ring them and sit in a queue for half a day I thought I'd try here😄

I do not work. 
I am currently drawing down from my pension.
Looking into first savers interest and also personal savings allowance.
Current tax personal allowance is £12570 
If I draw down from my pension £12570 annually it is classed as tax free. I get 20% taxed by the pension company and reclaim the tax from hmrc

IF I can save sufficient monies into say a bond, and get £6000 interest, my understanding is that this will all be tax free. 

First savers rate is £5000
Personal savers allowance is £1000

Therefore my understanding is I can achieve £18750 tax free AS LONG as my my pension income (drawdown) is less than £12570.

Can somebody confirm or deny this.

eskbanker

You're close - you can earn £12,570 of taxable pension income and fit it within your personal tax allowance, and up to a further £6,000 of savings interest, which is taxable income but would fit within the nil-rate bands, for a total of £18,570 without paying income tax.

There are various additional tax-free options, such as 25% of pension drawdowns (i.e. if you draw down £16,760, 25% is tax-free and the other 75% would fit within your PTA) and using tax wrappers such as ISAs, or even premium bonds, rather than taxable savings accounts....

However, in general, the best approach is to aim to maximise net return rather than to avoid tax as such, so worth bearing that in mind when planning your strategy!

Bookworm105

chrisamyphillip said:

Therefore my understanding is I can achieve £18750 tax free AS LONG as my my pension income (drawdown) is less than £12570.

yes, except for your typo, it is £18,570

chrisamyphillip

Hi
First of all thank you 

I've already taken the 25% tax free in a previous tax year and the pension is now in a drawdown scheme. It's a fixed amount left (defined contribution).
I've maximised my ISA allowance 

I'm trying to 'empty' this particular pension before I start my defined benefits pension and state pension in about 6 years. 

I have thought about premium bonds but at the moment thought that trying to obtain as much tax free income at this point. Id look at premium bonds once I've maximised my tax free amounts before the other pension commence.

So the £18570 tax free amount is correct?

Thoughts?

Grumpy_chap

The OP has not mentioned their relationship status or the income that any partner has but it may be possible to slightly increase the OP's personal allowance if marriage allowance is available.

chrisamyphillip

I am indeed married but my wife died not work either. What impact/increase in relief could this give please?

Dazed_and_C0nfused

chrisamyphillip said:

I am indeed married but my wife died not work either. What impact/increase in relief could this give please?

You cannot have a Personal Allowance greater than £12,570.

But if your spouse applies for Marriage Allowance this had an impact for both of you.

She would have a reduced Personal Allowance of £11,310 and still get savings starters rate band and savings nil rate band (aka Personal Savings Allowance) as normal.

Your Personal Allowance would remain £12,570 but you would have £252 knocked off your income tax liability. 

The £252 credit is not repayable so if your tax liability was say £100 then this gets reduced to zero and the remaining £152 is of no benefit to you.

Dazed_and_C0nfused

If I draw down from my pension £12570 annually it is classed as tax free. I get 20% taxed by the pension company and reclaim the tax from hmrc

Unless you are continually emptying pensions under the "small pots" rules there should be no need for that.  The emergency tax code (1257L) should be used so you can avoid paying any tax.

Also, any interest from a normal (non ISA) account will be taxable income and, if you have pension income of £12,570, will be taxed.

It might all be taxed at 0% but it's still taxable income.

Interest from Cash ISA's is "tax free".

chrisamyphillip

All

This has been extremely helpful, thank you and confirmed what 'i thought'.

Question: the First Savers Rate and the Personal Savers Rate (£5K and £1K respectively), can be utilised each financial year?

eskbanker

chrisamyphillip said:

Question: the First Savers Rate and the Personal Savers Rate (£5K and £1K respectively), can be utilised each financial year?

Yes, but probably best to use their standard names to minimise any confusion, even though these aren't technically 'allowances' but nil-rate bands:

Your allowances for earning interest before you have to pay tax on it include:

• your Personal Allowance
• starting rate for savings
• Personal Savings Allowance

You get these allowances each tax year. How much you get depends on your other income. The tax year runs from 6 April to 5 April the following year.

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