£17,570 Tax Free Interest on Savings for a non-working, non-income wife?

dodmwe

artyboy said:

...well that, plus it's also then inside your estate (or rather your wife's estate) and therefore becomes liable for IHT, which it wouldn't (currently) if it remained within the pension wrapper.

It is a tax-free lump sum from a DB pension so there is no IHT benefits of keeping it in a pension wrapper, as the pension dies when we both die.

I don't particularly want to take the lump sum, but if I didn't, the extra pension income I receive would be taxed at 40%, compared with 0% for the lump sum. A commutation factor of nearly 29 sweetens the deal.

dodmwe

jaypers said:

Sure you’ve looked at this, but……..
Max out both of your ISA allowances for the year.
Make sure you don’t have more than £85k in any single institution each, and watch out of subsidiaries, eg: Cahoot is owned by Santander etc.
With that sort of sum, I would seriously consider having a portion of it in investments as unless you intend to spend it, that’s far too much cash to sit on. 

With a frothy US stock market, I'm happy to sit on it in cash at ~4.5 to 5% tax free for a couple of years while we decide what to do with it.

dothenumbersaddup

Hi, there have been some suggestions that spousal exemptions may be under review - if you are keen to equalise assets between you both, it may be worth proceeding with this now whilst it is tax exempt rather than leaving and risking a tax transfer charge.  It isn’t that this is known to be happening, merely that if it did it could have significant impact on your situation.

Allergictotax666

I think there is a band of 40% tax.

Example 1

My pension   is 12570. I pay no tax as that = the personal allowance.

Also, I have £ 5000 paid in interest from a £100000 legacy. That is covered by the Starting rate  for Savings. I pay no tax, and my income is 17570 pounds.

 

Example 2- the problem.

Hurray- I get a large pension increase! I now get £17570  in pension- the magic number. I still have the £5000 interest too!.

But now I pay tax on £5000 of my pension at basic rate 20%.

Also, the whole of the starting savings rate has disappeared, as I lose £1 of it for each pound of GROSS pension income, not NET.

So I pay tax on another £5000 at base rate 20%.

My tax rate on that income above £17570 is 40%.

My income is now 20570. I have lost 40% of my extra pension

 

This is very inconsistent compared to a person in employment who does not see a personal tax rate of 40% until he earns about £50000.  

I've ignored the £1000 Savings interest amount here, but in principle am I correct in saying that there is a 40% tax band at a very low income?

Albermarle

You could look at it the other way, and say that being able to have an extra £5K savings starting rate is quite a tax concession in the first place.