Clarification concerning starter rate for savings and capital gains

mrodent33

I saw this thread.

Dazed_and_C0nfused there says: "But the savings starter rate uses some of the basic rate band so could impact CGT in some instances" ... and then gives an example.

I don't understand from the example the way in which the starter rate "uses some of the basic rate", i.e. what rules are applicable.

My situation for tax year 24-25 so far is quite different from previous years, largely due to an inheritance which I was paid in early 2024. Most of this is now in GIA accounts: global trackers, etc.

I have a micro-company and have paid myself a minimal salary of £9100 for 24-25. I have made capital gains so far (for 24-25) of 27000, so taxable gains of 24000. These were realised before the budget, so 10%, i.e. CGT of 2400.

I **think** I may be the kind of person who can take advantage of the £5000 "starter rate for savings". My income consists of this £9100 and (so far) about £1000 in dividends and about £900 in bank account interest.

Desire for diversification and suspicions that the S&P (in particular) is in bubble territory is leading me to diversify a bit. 4.7%, if tax-free, suddenly becomes fairly attractive.

There are 108 days left to the end of the tax year. I've just opened an account with Close Brothers, 4.7%. If I now put the maximum protected (85k) into that I receive £1180 by year end. Another similar sum at a similar rate with another establishment means I'll probably end up with about £3000 savings interest by April 5 2025.

Taking no account of the dividends or bank account interest, I believe I could make up to £40,700 capital gains over the year without getting into the higher rate band. (40700 - 3000 allowance = ) 37700. But what if I also earn £3000 in interest and say £1500 dividends as described? How does this then affect the maximum capital gains I'd want not to exceed in order to avoid higher rate tax for 24-25, but also keep all that £3000 interest tax-free?

Also, does anyone know where these rules might be spelt out in an understandable way?

eskbanker

The main thing to bear in mind is that savings interest and dividends are both taxable income, even though they may be wholly or partly taxed at 0% via the nil-rate bands generally (but misleadingly) labelled as 'allowances', so you need to use the gross figures when ascertaining how much headroom you have for CGT.

mrodent33

Thanks. 

Unless I've got it wrong, it appears that if you go over the PA with your employment income (and start paying basic rate), this starts, under the rules, to reduce the amount of "starter rate for savings allowance". But if your employment income is **under** £12570, obviously you haven't used up all the PA, so a proportion of it at least (in my case 12570 - 9100 = 3470) would be used up first on the dividends and savings interest.

So is it in fact possible to earn more than £5000 savings interest and for it to be tax-free? In my case, I've got 3470 unused PA...  so (assuming £0 in dividends for the moment), can I in fact theoretically make 3470 + 5000 = 8470 in savings interest before I start paying tax on that savings interest? Or is eligible interest somehow "capped" at 5000 regardless?

eskbanker

mrodent33 said:

Thanks. 

Unless I've got it wrong, it appears that if you go over the PA with your employment income (and start paying basic rate), this starts, under the rules, to reduce the amount of "starter rate for savings allowance". But if your employment income is **under** £12570, obviously you haven't used up all the PA, so a proportion of it at least (in my case 12570 - 9100 = 3470) would be used up first on the dividends and savings interest.

So is it in fact possible to earn more than £5000 savings interest and for it to be tax-free? In my case, I've got 3470 unused PA...  so (assuming £0 in dividends for the moment), can I in fact theoretically make 3470 + 5000 = 8470 in savings interest before I start paying tax on that savings interest? Or is eligible interest somehow "capped" at 5000 regardless?

You can theoretically receive up to £18,570 in savings interest without paying tax, i.e. your £12,570 personal tax allowance, plus £5K starter savings rate and then also the £1K personal savings allowance, but as you say, other taxable income will erode this total though....

https://www.moneysavingexpert.com/savings/tax-free-savings/