Savings and Tax allowances

Dazed_and_C0nfused

EthicsGradient said:

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.

The recipient of Marriage Allowance gets a tax credit of £252.  Not any extra Personal Allowance.

The dividend income is taxed last and in my example that would be,

£500 x 0% = 0.00
£2,880 x 8.75% = 252.00

So total liability of £252 but that would be reduced by the Marriage Allowance tax reducer, leaving £0 payable.

lr1277

@M4rtyman how do you propose to deal with inflation and change in interest rates?

Depending on your lifespan you may need your income for 20-30 years during which time prices for pretty much everything will go up whereas your interest income may not, especially if you withdraw all the interest to pay taxes and fund your life. Basically you would lose the advantages of compounding.

A few years ago, there were articles about this, not necessarily in MSE. The following is based on best recollection and does not consider taxes:

Say you had a dividend income of 5% of your portfolio value. It was suggested you only take 40-60% out to pay your living expenses. The rest of the dividend income you would keep in your account to buy more shares etc etc so you could have a bigger dividend income in the future.

The amount withdrawn would also have to be sufficient to pay the taxable income on your dividends as well as pay your living expenses.

This example mentions dividends, but I see the same for savings interest income. You should leave some of the income in the account so you can have a larger interest income in subsequent years.

As I said this does not take into reductions in interest rate.

I am not clever enough to work out how much dividend/interest income you would need to pay taxes on said income plus give you enough to live on plus leave some in the account so you can have increased incomes in the future to keep up with inflation.

Something for you to think about?

EthicsGradient

Dazed_and_C0nfused said:

EthicsGradient said:

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.

The recipient of Marriage Allowance gets a tax credit of £252.  Not any extra Personal Allowance.

The dividend income is taxed last and in my example that would be,

£500 x 0% = 0.00
£2,880 x 8.75% = 252.00

So total liability of £252 but that would be reduced by the Marriage Allowance tax reducer, leaving £0 payable.

Is that really how it's calculated? Because this HMRC page implies it's the other way round:

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.
This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
Marriage Allowance: How it works - GOV.UK

Dazed_and_C0nfused

EthicsGradient said:

Dazed_and_C0nfused said:

EthicsGradient said:

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.

The recipient of Marriage Allowance gets a tax credit of £252.  Not any extra Personal Allowance.

The dividend income is taxed last and in my example that would be,

£500 x 0% = 0.00
£2,880 x 8.75% = 252.00

So total liability of £252 but that would be reduced by the Marriage Allowance tax reducer, leaving £0 payable.

Is that really how it's calculated? Because this HMRC page implies it's the other way round:

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.
This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
Marriage Allowance: How it works - GOV.UK

I'm not really sure what you mean?

The Marriage Allowance applicant has a reduced Personal Allowance (currently £11,310).

The Marriage Allowance recipient, usually the higher income person in the couple, received a tax reduction of upto £252.  Exactly as stated on the gov.uk guidance page you refer to.  They do not get additional Personal Allowance.

So if the recipient has a tax liability of £100 that is reduced to £0.  If the liability is £252, as in my example, it is reduced to £0.  If the liability was say £500 it would be reduced to £248.

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year 

As ever LITRG have a better explanation than gov.uk though.  See the example of Marjorie and Carl here,

https://www.litrg.org.uk/tax-nic/income-tax/tax-allowances/marriage-allowance-transferable-tax-allowance

jimjames

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.

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.

You're assuming an ISA means cash ISA and I agree that cash ISAs would not be worth anywhere near £900k. If you have wisely invested in S&S ISAs however that figure is easily achievable.

EthicsGradient

Dazed_and_C0nfused said:

EthicsGradient said:

Dazed_and_C0nfused said:

EthicsGradient said:

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.

The recipient of Marriage Allowance gets a tax credit of £252.  Not any extra Personal Allowance.

The dividend income is taxed last and in my example that would be,

£500 x 0% = 0.00
£2,880 x 8.75% = 252.00

So total liability of £252 but that would be reduced by the Marriage Allowance tax reducer, leaving £0 payable.

Is that really how it's calculated? Because this HMRC page implies it's the other way round:

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.
This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
Marriage Allowance: How it works - GOV.UK

I'm not really sure what you mean?

The Marriage Allowance applicant has a reduced Personal Allowance (currently £11,310).

The Marriage Allowance recipient, usually the higher income person in the couple, received a tax reduction of upto £252.  Exactly as stated on the gov.uk guidance page you refer to.  They do not get additional Personal Allowance.

So if the recipient has a tax liability of £100 that is reduced to £0.  If the liability is £252, as in my example, it is reduced to £0.  If the liability was say £500 it would be reduced to £248.

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year 

As ever LITRG have a better explanation than gov.uk though.  See the example of Marjorie and Carl here,

https://www.litrg.org.uk/tax-nic/income-tax/tax-allowances/marriage-allowance-transferable-tax-allowance

What I mean is that HMRC says it's a transfer of allowance, not a tax credit. This can reduce tax by up to £252, but that doesn't mean it will reduce it by £252.

If it is calculated as a tax credit, and thus may reduce tax (if it's at a rate less than 20%) by more than a transferred allowance, then you get the strange situation of a couple paying less tax if their incomes are more unbalanced.

Consider a couple with £27,260 of dividend income and nothing else. If they divide this income as £11,310 for spouse A, and £15,950 for spouse B, and use the Marriage Allowance, then spouse A pays no tax (£12,570 - £1,260 = £11,310), and spouse B would be worked out as £15,950 - £12,570 - £500 = £2,880 at 8.75% = £252, which this tax credit would cancel out.

But if  the couple's split of the same dividend income were more even - £13,070 for spouse A (£12,570 + £500, so no income tax to pay), and £14,190 for spouse B, then spouse B would pay tax on 14190-13070=£1,120 = £98.

This seems contrary to the general situation - that progressive taxation means uneven incomes will normally pay more.

Dazed_and_C0nfused

EthicsGradient said:

Dazed_and_C0nfused said:

EthicsGradient said:

Dazed_and_C0nfused said:

EthicsGradient said:

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.

The recipient of Marriage Allowance gets a tax credit of £252.  Not any extra Personal Allowance.

The dividend income is taxed last and in my example that would be,

£500 x 0% = 0.00
£2,880 x 8.75% = 252.00

So total liability of £252 but that would be reduced by the Marriage Allowance tax reducer, leaving £0 payable.

Is that really how it's calculated? Because this HMRC page implies it's the other way round:

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.
This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).
Marriage Allowance: How it works - GOV.UK

I'm not really sure what you mean?

The Marriage Allowance applicant has a reduced Personal Allowance (currently £11,310).

The Marriage Allowance recipient, usually the higher income person in the couple, received a tax reduction of upto £252.  Exactly as stated on the gov.uk guidance page you refer to.  They do not get additional Personal Allowance.

So if the recipient has a tax liability of £100 that is reduced to £0.  If the liability is £252, as in my example, it is reduced to £0.  If the liability was say £500 it would be reduced to £248.

Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner.

This reduces their tax by up to £252 in the tax year 

As ever LITRG have a better explanation than gov.uk though.  See the example of Marjorie and Carl here,

https://www.litrg.org.uk/tax-nic/income-tax/tax-allowances/marriage-allowance-transferable-tax-allowance

What I mean is that HMRC says it's a transfer of allowance, not a tax credit. This can reduce tax by up to £252, but that doesn't mean it will reduce it by £252.

If it is calculated as a tax credit, and thus may reduce tax (if it's at a rate less than 20%) by more than a transferred allowance, then you get the strange situation of a couple paying less tax if their incomes are more unbalanced.

Consider a couple with £27,260 of dividend income and nothing else. If they divide this income as £11,310 for spouse A, and £15,950 for spouse B, and use the Marriage Allowance, then spouse A pays no tax (£12,570 - £1,260 = £11,310), and spouse B would be worked out as £15,950 - £12,570 - £500 = £2,880 at 8.75% = £252, which this tax credit would cancel out.

But if  the couple's split of the same dividend income were more even - £13,070 for spouse A (£12,570 + £500, so no income tax to pay), and £14,190 for spouse B, then spouse B would pay tax on 14190-13070=£1,120 = £98.

This seems contrary to the general situation - that progressive taxation means uneven incomes will normally pay more.

The legislation is quite clear.  The recipient gets a tax reduction, not any extra allowances.

Tax reduction: entitlement

(1)An individual is entitled to a tax reduction for a tax year of the appropriate percentage of the transferable amount if the conditions in subsection (2) are met.

https://www.legislation.gov.uk/ukpga/2014/26/section/11

This is how Married Couple's Allowance works as well. You don't get any extra allowances, you get a tax reduction.