Savings interest in 40% band

IceCreamCone10

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

Mark_d

I would increase pension contributions to keep below the 40% bracket.  In my opinion that is the best thing you can do

saajan_12

IceCreamCone10 said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

It doesn't make a difference - the salary and savings income is simply added together (after the various allowances) so if your savings interest is £x above the 40% threshold, you could contribute £x more from your salary to your pension, thus reducing your take home salary but with the difference being made up by the savings interest. 

Remember pension contributions just mean you don't pay the tax now. You would pay whatever your tax rate is when you withdraw the money from the pension.. usually that would be lower when retired, but if you have significant assets / savings that generate passive interest income annually, then that could push you up so you start paying some tax later. Of course that's based on the current rules and anything could change. 

Yorkie1

IceCreamCone10 said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

I started making additional contributions to my Civil Service pension in order to bring myself back under the 40% band limit. It doesn't make any difference whether it's for added pension, EPA (which gives you the right to take that year's pension accumulation a certain number of years early without them being reduced), AVCs (which is a stocks and shares pension run through the Civil service providers), or a completely separate standalone personal pension.

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Dazed_and_C0nfused

Yorkie1 said:

IceCreamCone10 said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

I started making additional contributions to my Civil Service pension in order to bring myself back under the 40% band limit. It doesn't make any difference whether it's for added pension, EPA (which gives you the right to take that year's pension accumulation a certain number of years early without them being reduced), AVCs (which is a stocks and shares pension run through the Civil service providers), or a completely separate standalone personal pension.

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Not normally no.  But Gift Aid donations can be used to increase your basic rate band, keeping more income in the basic rate band and less (or none) in the higher rate band 😃

Dazed_and_C0nfused

IceCreamCone10 said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

You need to look at this in two steps, firstly look at your overall liability ignoring the savings nil rate band.

That determines if you are classed as a higher rate payer or not.  If you are them you include the £500 savings nil rate band.  If not it's £1,000.

And don't forget that the £500 (or £1,000) uses up any remaining basic rate band, effectively a rate band within a rate band.

IceCreamCone10

Thanks for all your replies. I will be in the higher rate band so have decided on Alpha added pension. Do my simplified maths and assumptions look ok (or not) below - sorry if these are very basic questions:

• total taxable income this tax year c£56k (48k after standard pension contributions + 8k gross savings interest).
• buy added pension lump sum (to revert to 20% taxpayer) before next tax year.
• to claim higher rate tax relief, presumably I can’t do it via my personal tax account and I don’t qualify for self assessment.
• for eg. £6k lump sum, this is increased automatically by 20% of tax relief? So I claim only for the higher rate relief by quoting the gross £7146 contribution figure? (5730 x 20% = 1146 then add to lump sum? 5730 is part of the lump sum over the 50270 threshold)
• monthly contributions for the next tax year will have automatic higher rate tax relief.

Does all this run parallel to the personal savings allowance? And as I would revert to a basic rate taxpayer after added pension, is that allowance £1k so 20% savings tax, or still £500 at 40% because my original total taxable income was in the 40% band?

Does anyone also know how fast the added pension process is at the moment? If the admin slips into the next tax year (as we are in November already), then presumably they will backdate it all.

MetaPhysical

The situation gets even worse at the 100k level where your PA is gradually taken away and you lose childcare.  I saved myself many, many thousands of pounds in completely avoidable tax and have many thousands more in my pension by following @Dazed_and_C0nfused and @Albermarle advice.

Yorkie1

Dazed_and_C0nfused said:

Yorkie1 said:

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Not normally no.  But Gift Aid donations can be used to increase your basic rate band, keeping more income in the basic rate band and less (or none) in the higher rate band 😃

Ah yes, different horse for a slightly different (but similar outcome) course. Clarification much appreciated

Dazed_and_C0nfused

IceCreamCone10 said:

Thanks for all your replies. I will be in the higher rate band so have decided on Alpha added pension. Do my simplified maths and assumptions look ok (or not) below - sorry if these are very basic questions:

• total taxable income this tax year c£56k (48k after standard pension contributions + 8k gross savings interest).
• buy added pension lump sum (to revert to 20% taxpayer) before next tax year.
• to claim higher rate tax relief, presumably I can’t do it via my personal tax account and I don’t qualify for self assessment.
• for eg. £6k lump sum, this is increased automatically by 20% of tax relief? So I claim only for the higher rate relief by quoting the gross £7146 contribution figure? (5730 x 20% = 1146 then add to lump sum? 5730 is part of the lump sum over the 50270 threshold)
• monthly contributions for the next tax year will have automatic higher rate tax relief.

Does all this run parallel to the personal savings allowance? And as I would revert to a basic rate taxpayer after added pension, is that allowance £1k so 20% savings tax, or still £500 at 40% because my original total taxable income was in the 40% band?

Does anyone also know how fast the added pension process is at the moment? If the admin slips into the next tax year (as we are in November already), then presumably they will backdate it all.

If you are buying added Alpha pension why do you think your payment is increased by "20% of tax relief"?

Even if it was where are you getting £7,146 from 🤔.  I know you have added some figures but if 20% tax relief is being applied where does £7,146 come into things?

Your tax liability would initially be calculated factoring in any allowable pension contributions and that determines if you are a higher rate payer or not.

And once that is known the £500 or £1,000 savings nil rate band is applied.

I think your main confusion though is around Alpha added pension.  Can you provide a link which shows basic rate relief is added?  As that is usually just applicable to relief at source contributions I think you may have misunderstood something here.  But equally you may know something about Alpha added pension I don't.

Dazed_and_C0nfused

Found this on the Civil Service/Alpha pension website,

Will I get tax relief on my added pension contributions?

You’ll receive tax relief on contributions that do not exceed the limits set by HM Revenue and Customs. If the deduction comes directly from your salary then your tax relief is automatic. If you make a lump sum contribution by BACS or personal cheque, no tax relief is applied. You’ll have to claim the tax relief from HMRC directly.