Savings and Tax allowances

M4rtyman

I've just seen a recent post by Martin on Twitter, where he outlines tax allowances and how much we are allowed to earn in interest before paying tax. Now, I was always aware of the normal personal tax allowance (currently £12,570) and the personal savings allowance for 20% tax payers (£1,000). However, I wasn't aware of the "Starting rate for savings" that gives up to £5,000 as well. So in theory someone could have £18,570 in tax free allowance.
So I tried to get my head round this. If someone had packed in work and had enough savings to earn £18k a year at current interest rates, he wouldn't be paying any tax at all. So in theory, if someone wasn't working and had £450k in a range of savings accounts/bonds, paying 4% interest. He would then make £18k a year from that, but wouldn't pay tax on any of it. However, someone working and earning £16k is paying more tax than the guy living off the interest.
Have I got that right? Or have I missed something? Coz if it's correct, this may influence my early retirement strategy

eskbanker

Yes, there are more tax concessions available for savings income than that from employment - it's all covered in articles such as:

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

M4rtyman

Thanks for that. I've just done a quick calc to try and extrapolate further. If you were lucky enough to have double that amount in savings - ie. £900k. This would generate £36K annual income at a 4% interest rate. And you would only be paying about £3.5K in taxes.
Interesting ...

jimjames

M4rtyman said:

Thanks for that. I've just done a quick calc to try and extrapolate further. If you were lucky enough to have double that amount in savings - ie. £900k. This would generate £36K annual income at a 4% interest rate. And you would only be paying about £3.5K in taxes.
Interesting ...

Even more interesting if you had that amount in ISAs as a reasonable number of people do, you'd be able to get the whole amount completely tax free every year.

Sam_666

Visit hmrc website for all up to date info on tax alowances. Dead simple.

M4rtyman

jimjames said:

Even more interesting if you had that amount in ISAs as a reasonable number of people do, you'd be able to get the whole amount completely tax free every year.

I had thought about that. However, the amounts people will currently have saved in ISAs will probably not be anywhere near the £900k suggested above, since the annual limit was only raised to £20k in 2017/18. I remember the days when that limit was only £3k in cash.

But yeah - if a decent portion of your savings is in ISAs, then that £3.5k estimated tax bill would reduce even more.

eskbanker

M4rtyman said:

jimjames said:

Even more interesting if you had that amount in ISAs as a reasonable number of people do, you'd be able to get the whole amount completely tax free every year.

Well yeah, I had thought about that. However, the amounts people will currently have saved in ISAs will probably not be anywhere near the £900k suggested above, since the annual limit was only raised to £20k in 2017/18. I remember the days when that limit was only £3k in cash.

The point stands that anyone interested in taxation on substantial savings ought to factor in the optimal use of tax wrappers, so in terms of the impact of the discussion on your early retirement strategy, do you really have a substantial pot of cash from which you need to maximise the net return?  Is this close to the £450K or £900K figures you mention, and/or to what extent are you already making best use of tax wrappers?

Dazed_and_C0nfused

M4rtyman said:

I've just seen a recent post by Martin on Twitter, where he outlines tax allowances and how much we are allowed to earn in interest before paying tax. Now, I was always aware of the normal personal tax allowance (currently £12,570) and the personal savings allowance for 20% tax payers (£1,000). However, I wasn't aware of the "Starting rate for savings" that gives up to £5,000 as well. So in theory someone could have £18,570 in tax free allowance.
So I tried to get my head round this. If someone had packed in work and had enough savings to earn £18k a year at current interest rates, he wouldn't be paying any tax at all. So in theory, if someone wasn't working and had £450k in a range of savings accounts/bonds, paying 4% interest. He would then make £18k a year from that, but wouldn't pay tax on any of it. However, someone working and earning £16k is paying more tax than the guy living off the interest.
Have I got that right? Or have I missed something? Coz if it's correct, this may influence my early retirement strategy

If you want to take it a step further (in taxable income terms) you could actually have total taxable income of £21,950 and not pay any tax if you income includes at least £6,000 in interest and £3,380 in dividends.  And you receive Marriage Allowance.

For someone old enough to qualify for Married Couple's Allowance instead of Marriage Allowance that £21,950 will probably be in excess of £30k.

And of course if you are under 75 you can also contribute £2,880 to a pension and receive £720 in basic rate relief each year despite not paying any tax in the in the first place.

EthicsGradient

Dazed_and_C0nfused said:

M4rtyman said:

I've just seen a recent post by Martin on Twitter, where he outlines tax allowances and how much we are allowed to earn in interest before paying tax. Now, I was always aware of the normal personal tax allowance (currently £12,570) and the personal savings allowance for 20% tax payers (£1,000). However, I wasn't aware of the "Starting rate for savings" that gives up to £5,000 as well. So in theory someone could have £18,570 in tax free allowance.
So I tried to get my head round this. If someone had packed in work and had enough savings to earn £18k a year at current interest rates, he wouldn't be paying any tax at all. So in theory, if someone wasn't working and had £450k in a range of savings accounts/bonds, paying 4% interest. He would then make £18k a year from that, but wouldn't pay tax on any of it. However, someone working and earning £16k is paying more tax than the guy living off the interest.
Have I got that right? Or have I missed something? Coz if it's correct, this may influence my early retirement strategy

If you want to take it a step further (in taxable income terms) you could actually have total taxable income of £21,950 and not pay any tax if you income includes at least £6,000 in interest and £3,380 in dividends.  And you receive Marriage Allowance.

For someone old enough to qualify for Married Couple's Allowance instead of Marriage Allowance that £21,950 will probably be in excess of £30k.

And of course if you are under 75 you can also contribute £2,880 to a pension and receive £720 in basic rate relief each year despite not paying any tax in the in the first place.

"£3,380 in dividends"? The zero rate dividend band is £500 this year. Where are you getting the rest (it's not £3,000 exactly, so you're not talking about the CGT allowance)?

Dazed_and_C0nfused

EthicsGradient said:

Dazed_and_C0nfused said:

M4rtyman said:

I've just seen a recent post by Martin on Twitter, where he outlines tax allowances and how much we are allowed to earn in interest before paying tax. Now, I was always aware of the normal personal tax allowance (currently £12,570) and the personal savings allowance for 20% tax payers (£1,000). However, I wasn't aware of the "Starting rate for savings" that gives up to £5,000 as well. So in theory someone could have £18,570 in tax free allowance.
So I tried to get my head round this. If someone had packed in work and had enough savings to earn £18k a year at current interest rates, he wouldn't be paying any tax at all. So in theory, if someone wasn't working and had £450k in a range of savings accounts/bonds, paying 4% interest. He would then make £18k a year from that, but wouldn't pay tax on any of it. However, someone working and earning £16k is paying more tax than the guy living off the interest.
Have I got that right? Or have I missed something? Coz if it's correct, this may influence my early retirement strategy

If you want to take it a step further (in taxable income terms) you could actually have total taxable income of £21,950 and not pay any tax if you income includes at least £6,000 in interest and £3,380 in dividends.  And you receive Marriage Allowance.

For someone old enough to qualify for Married Couple's Allowance instead of Marriage Allowance that £21,950 will probably be in excess of £30k.

And of course if you are under 75 you can also contribute £2,880 to a pension and receive £720 in basic rate relief each year despite not paying any tax in the in the first place.

"£3,380 in dividends"? The zero rate dividend band is £500 this year. Where are you getting the rest (it's not £3,000 exactly, so you're not talking about the CGT allowance)?

The £3,380 would be taxed £500 at dividend nil rate and £2,880 at dividend basic rate.

And the Marriage Allowance tax credit would reduce the tax payable to £0.

EthicsGradient

Dazed_and_C0nfused said:

EthicsGradient said:

Dazed_and_C0nfused said:

M4rtyman said:

I've just seen a recent post by Martin on Twitter, where he outlines tax allowances and how much we are allowed to earn in interest before paying tax. Now, I was always aware of the normal personal tax allowance (currently £12,570) and the personal savings allowance for 20% tax payers (£1,000). However, I wasn't aware of the "Starting rate for savings" that gives up to £5,000 as well. So in theory someone could have £18,570 in tax free allowance.
So I tried to get my head round this. If someone had packed in work and had enough savings to earn £18k a year at current interest rates, he wouldn't be paying any tax at all. So in theory, if someone wasn't working and had £450k in a range of savings accounts/bonds, paying 4% interest. He would then make £18k a year from that, but wouldn't pay tax on any of it. However, someone working and earning £16k is paying more tax than the guy living off the interest.
Have I got that right? Or have I missed something? Coz if it's correct, this may influence my early retirement strategy

If you want to take it a step further (in taxable income terms) you could actually have total taxable income of £21,950 and not pay any tax if you income includes at least £6,000 in interest and £3,380 in dividends.  And you receive Marriage Allowance.

For someone old enough to qualify for Married Couple's Allowance instead of Marriage Allowance that £21,950 will probably be in excess of £30k.

And of course if you are under 75 you can also contribute £2,880 to a pension and receive £720 in basic rate relief each year despite not paying any tax in the in the first place.

"£3,380 in dividends"? The zero rate dividend band is £500 this year. Where are you getting the rest (it's not £3,000 exactly, so you're not talking about the CGT allowance)?

The £3,380 would be taxed £500 at dividend nil rate and £2,880 at dividend basic rate.

And the Marriage Allowance tax credit would reduce the tax payable to £0.

Marriage Allowance is £1,260. How does that grow to £2,880? £2,880 is the net amount you're allowed to contribute to a pension with no relevant earnings, but that doesn't mean you don't pay tax. It means there's a credit to the pension, but that may get taxed on the way out.