Savings interest used by HMRC to push me into 40% bracket

martinbuckley

Hi, after some advice from someone with a better understanding of HMRC PAYE than me.

I have always been a basic rate taxpayer through PAYE, and my wife has donated me 10% of her allowance for years, so my tax code allowance has been £13827 for a good few years.

In December, I got notification from HMRC that I owed £481 in tax for the year 23/24 and my coding was going to change.  When I looked at the income, I have approx £49,500 in PAYE taxable income on record and £1252 in interest. HMRC have added the £1252 to my £49500 to say I "earned" £50,752, removed £500 of my personal savings allowance, removed my wife's 10% and taxed the difference at 40%.

Is this correct? I was under the impression that as a Basic Rate Taxpayer, I should get the first £1000 of interest free, then pay tax on the £252 at 20%, and I should still be able to retain my wife's 10% until such time as my PAYE earnings exceed £50270.

TheSpectator

But your not a basic rate taxpayer with the interest added are you? It's your total taxable income including the interest that determines whether you are a higher rate taxpayer - you are a higher rate taxpayer.

eskbanker

martinbuckley said:

Hi, after some advice from someone with a better understanding of HMRC PAYE than me.

I have always been a basic rate taxpayer through PAYE, and my wife has donated me 10% of her allowance for years, so my tax code allowance has been £13827 for a good few years.

In December, I got notification from HMRC that I owed £481 in tax for the year 23/24 and my coding was going to change.  When I looked at the income, I have approx £49,500 in PAYE taxable income on record and £1252 in interest. HMRC have added the £1252 to my £49500 to say I "earned" £50,752, removed £500 of my personal savings allowance, removed my wife's 10% and taxed the difference at 40%.

Is this correct? I was under the impression that as a Basic Rate Taxpayer, I should get the first £1000 of interest free, then pay tax on the £252 at 20%, and I should still be able to retain my wife's 10% until such time as my PAYE earnings exceed £50270.

The important factor is that your savings interest is taxable income - the personal savings allowance isn't actually an allowance in the genuine sense, but is instead a nil-rate band, so the income within the 'allowance' is taxable but at 0%.

As above, you have tipped over into being a higher rate taxpayer by virtue of this, which has the double whammy effect of lowering your PSA but also disqualifying you from using the marriage allowance.

zagfles

eskbanker said:

martinbuckley said:

Hi, after some advice from someone with a better understanding of HMRC PAYE than me.

I have always been a basic rate taxpayer through PAYE, and my wife has donated me 10% of her allowance for years, so my tax code allowance has been £13827 for a good few years.

In December, I got notification from HMRC that I owed £481 in tax for the year 23/24 and my coding was going to change.  When I looked at the income, I have approx £49,500 in PAYE taxable income on record and £1252 in interest. HMRC have added the £1252 to my £49500 to say I "earned" £50,752, removed £500 of my personal savings allowance, removed my wife's 10% and taxed the difference at 40%.

Is this correct? I was under the impression that as a Basic Rate Taxpayer, I should get the first £1000 of interest free, then pay tax on the £252 at 20%, and I should still be able to retain my wife's 10% until such time as my PAYE earnings exceed £50270.

The important factor is that your savings interest is taxable income - the personal savings allowance isn't actually an allowance in the genuine sense, but is instead a nil-rate band, so the income within the 'allowance' is taxable but at 0%.

As above, you have tipped over into being a higher rate taxpayer by virtue of this, which has the double whammy effect of lowering your PSA but also disqualifying you from using the marriage allowance.

"Taxable at 0%" is pretty much the definition of any allowance. The PSA is just as much an allowance as the personal allowance is. The OP like most people seems to be including all PAYE earnings even earnings covered by the personal allowance in his quoted "taxable earnings", so clearly all interest including interest covered by the PSA is taxable interest using the same logic and definition of "allowance"

The complication with the PSA is the cliff edge reduction plus the MA cliff edge when total taxable income exceeds the BR band. 

martinbuckley

Thanks folks.  I didnt realise that interest on my savings that I saved after I'd paid tax at 20% was included.

Lesson learned!

Dazed_and_C0nfused

martinbuckley said:

Thanks folks.  I didnt realise that interest on my savings that I saved after I'd paid tax at 20% was included.

Lesson learned!

Interest from a Cash ISA is tax free/exempt from tax.

The usual MSE approach is to look at best net return, so if a Cash ISA, which can have slightly lower interest rates, achieves that aim then that is a good option.

poseidon1

Dazed_and_C0nfused said:

martinbuckley said:

Thanks folks.  I didnt realise that interest on my savings that I saved after I'd paid tax at 20% was included.

Lesson learned!

Interest from a Cash ISA is tax free/exempt from tax.

The usual MSE approach is to look at best net return, so if a Cash ISA, which can have slightly lower interest rates, achieves that aim then that is a good option.

It is an enduring mystery to me why many 20% tax payers fail to take advantage of ISAs for their savings and  for those who are near the threshold of 40% tax, it's an 'open goal' invitation to HMRC to tax their savings.

Messing about with the £1,000 and £500 0% savings tax rates seems nonsensical if annual ISA allowances have not yet been fully utilised. The 'invisibilty' of ISA savings interest from a tax point of view has much to commend it.

martinbuckley

Dazed_and_C0nfused said:

martinbuckley said:

Thanks folks.  I didnt realise that interest on my savings that I saved after I'd paid tax at 20% was included.

Lesson learned!

Interest from a Cash ISA is tax free/exempt from tax.

The usual MSE approach is to look at best net return, so if a Cash ISA, which can have slightly lower interest rates, achieves that aim then that is a good option.

ISA's already maxed out for the last 4 tax years.

zagfles

After ISAs there's also premium bonds which are tax free, and low coupon short term gilts where the main return is the tax free capital gain. For a basic rate taxpayer the benefit is marginal, but for a higher rate taxpayer they're pretty much a no-brainer for mid/longer term savings. PBs have a £50k limit but gilts are unlimited.  

WindfallWendy

Ooo, please please please can I try and tap into this to understand my own position as I keep confusing myself on when/where the 40% threshold is.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income)
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, £54-56k pre tax income.

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
And then I'll be charged 40% on the rest?

However, I've made a £5k additional payment into my pension (via my employer), and will make another £3k payment into my new workplace pension in March 2025. Which I think therefore reduces my taxable income by £8k. I.e. my income for 24/25 goes down from £54-56k to £46-48k. And actually I think there is another £1000 allowance for rental income isn't there, so that reduces again a little bit (£45-£47k). And then I guess £1000 allowance for savings interest too.

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

eskbanker

WindfallWendy said:

Ooo, please please please can I try and tap into this to understand my own position

[...]

Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Better to start your own thread for your enquiry about the effect of pension contributions on income tax liabilities....