Impact of higher tax rate on savings

millymollymandy73

Hi all,

My new job is going to push me into the higher rate tax band, though probably not this tax year. I remember Martin speaking about how the amount of savings interest you can earn before paying tax on it goes down at that point, but I can't recall and can't find how much savings you would have to have for that to have an effect. Does anyone know?

I usually save using several regular savers and keep anything I need access to in a cash ISA (since those rates are better atm). I am wondering at what amount my savings would be when it makes more sense to put them into an ISA?

For context, most of my savings accounts mature before the end of the tax year, so I'm thinking about what best to do with that money. I will already be transferring the maximum I can into a LISA (saving for buying a first home). I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. This higher tax rate things all makes it suddenly seem way more complicated to figure out what to do with the money!

Thanks for your help!

Qyburn

millymollymandy73 said:

My new job is going to push me into the higher rate tax band, though probably not this tax year
...
I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. 

The bands for the PSA (Personal Saving Allowance) are the same throughout the UK. So although you start to pay Scottish higher rate tax on earnings over £43,662, you still have the £1,000 PSA until they go above the English HR tax threshold of £50k or whatever it is.

I was confused by this when I first saw it in my tax calculation, just nudging into HR tax but still with £1,000 savings allowance.


(For the benefit of any pedants and to save them trouble of chipping in, I'm aware that for some obscure technical reason completely irrelevant to this question, the "Personal Savings Allowance" isn’t really an allowance.)

gravel_2

Qyburn said:

millymollymandy73 said:

My new job is going to push me into the higher rate tax band, though probably not this tax year
...
I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. 

The bands for the PSA (Personal Saving Allowance) are the same throughout the UK. So although you start to pay Scottish higher rate tax on earnings over £43,662, you still have the £1,000 PSA until they go above the English HR tax threshold of £50k or whatever it is.

I was confused by this when I first saw it in my tax calculation, just nudging into HR tax but still with £1,000 savings allowance.


(For the benefit of any pedants and to save them trouble of chipping in, I'm aware that for some obscure technical reason completely irrelevant to this question, the "Personal Savings Allowance" isn’t really an allowance.)

Is this true for Scotland? My understanding was that the Scottish categories of tax apply (so you will enter the category earlier) but the UK tax rate applies (so a Scottish 42% earner will pay 40% on interest over the PSA).

jimjames

If you're earning to pay the higher rate tax then any interest over £500 will be taxed. So you just need to work out if your regular savers will generate that. Using an ISA is worthwhile to avoid any other interest being taxed, they pay the best rates at the moment anyway.

ColdIron

gravel_2 said:

Qyburn said:

millymollymandy73 said:

My new job is going to push me into the higher rate tax band, though probably not this tax year
...
I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. 

The bands for the PSA (Personal Saving Allowance) are the same throughout the UK. So although you start to pay Scottish higher rate tax on earnings over £43,662, you still have the £1,000 PSA until they go above the English HR tax threshold of £50k or whatever it is.

I was confused by this when I first saw it in my tax calculation, just nudging into HR tax but still with £1,000 savings allowance.


(For the benefit of any pedants and to save them trouble of chipping in, I'm aware that for some obscure technical reason completely irrelevant to this question, the "Personal Savings Allowance" isn’t really an allowance.)

Is this true for Scotland? My understanding was that the Scottish categories of tax apply (so you will enter the category earlier) but the UK tax rate applies (so a Scottish 42% earner will pay 40% on interest over the PSA).

Yes. Scottish rates apply to earned income, pension income etc, they do not apply to savings or dividend income where UK rates and thresholds apply

The types of income to which Scottish income tax applies

Scottish income tax applies to non-savings and non-dividend income of Scottish taxpayers. So, for example, if you are a Scottish taxpayer, Scottish income tax affects the amount of income tax you pay on:

• employment income;
• profits from self-employment (including from sole trades and partnerships);
• rental profits;
• pension income (including the state pension); and
• taxable benefits.

Scottish income tax does not apply to savings income and dividend income. This means it does not affect the amount of income tax you pay on bank or building society interest or dividends.

https://www.litrg.org.uk/tax-nic/income-tax/scottish-income-tax/scottish-income-tax-more-detail#11

gravel_2

ColdIron said:

gravel_2 said:

Qyburn said:

millymollymandy73 said:

My new job is going to push me into the higher rate tax band, though probably not this tax year
...
I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. 

The bands for the PSA (Personal Saving Allowance) are the same throughout the UK. So although you start to pay Scottish higher rate tax on earnings over £43,662, you still have the £1,000 PSA until they go above the English HR tax threshold of £50k or whatever it is.

I was confused by this when I first saw it in my tax calculation, just nudging into HR tax but still with £1,000 savings allowance.


(For the benefit of any pedants and to save them trouble of chipping in, I'm aware that for some obscure technical reason completely irrelevant to this question, the "Personal Savings Allowance" isn’t really an allowance.)

Is this true for Scotland? My understanding was that the Scottish categories of tax apply (so you will enter the category earlier) but the UK tax rate applies (so a Scottish 42% earner will pay 40% on interest over the PSA).

Yes. Scottish rates apply to earned income, pension income etc, they do not apply to savings or dividend income where UK rates and thresholds apply

The types of income to which Scottish income tax applies

Scottish income tax applies to non-savings and non-dividend income of Scottish taxpayers. So, for example, if you are a Scottish taxpayer, Scottish income tax affects the amount of income tax you pay on:

• employment income;
• profits from self-employment (including from sole trades and partnerships);
• rental profits;
• pension income (including the state pension); and
• taxable benefits.

Scottish income tax does not apply to savings income and dividend income. This means it does not affect the amount of income tax you pay on bank or building society interest or dividends.

https://www.litrg.org.uk/tax-nic/income-tax/scottish-income-tax/scottish-income-tax-more-detail#11

The quoted part does not contradict what I said. I am aware UK income tax applies but my previous understanding is that WHEN a taxpayer enters the Basic/Higher rate status is dictated by the Scottish tax bands.

That link however does appear to clarify that it is both the bands and rates that distinctly apply to different types of income - good to know!

ColdIron

gravel_2 said:

ColdIron said:

gravel_2 said:

Qyburn said:

millymollymandy73 said:

My new job is going to push me into the higher rate tax band, though probably not this tax year
...
I am also resident in Scotland so that impacts the tax I pay, but not sure if it impacts this specifically. 

The bands for the PSA (Personal Saving Allowance) are the same throughout the UK. So although you start to pay Scottish higher rate tax on earnings over £43,662, you still have the £1,000 PSA until they go above the English HR tax threshold of £50k or whatever it is.

I was confused by this when I first saw it in my tax calculation, just nudging into HR tax but still with £1,000 savings allowance.


(For the benefit of any pedants and to save them trouble of chipping in, I'm aware that for some obscure technical reason completely irrelevant to this question, the "Personal Savings Allowance" isn’t really an allowance.)

Is this true for Scotland? My understanding was that the Scottish categories of tax apply (so you will enter the category earlier) but the UK tax rate applies (so a Scottish 42% earner will pay 40% on interest over the PSA).

Yes. Scottish rates apply to earned income, pension income etc, they do not apply to savings or dividend income where UK rates and thresholds apply

The types of income to which Scottish income tax applies

Scottish income tax applies to non-savings and non-dividend income of Scottish taxpayers. So, for example, if you are a Scottish taxpayer, Scottish income tax affects the amount of income tax you pay on:

• employment income;
• profits from self-employment (including from sole trades and partnerships);
• rental profits;
• pension income (including the state pension); and
• taxable benefits.

Scottish income tax does not apply to savings income and dividend income. This means it does not affect the amount of income tax you pay on bank or building society interest or dividends.

https://www.litrg.org.uk/tax-nic/income-tax/scottish-income-tax/scottish-income-tax-more-detail#11

The quoted part does not contradict what I said. I am aware UK income tax applies but my previous understanding is that WHEN a taxpayer enters the Basic/Higher rate status is dictated by the Scottish tax bands.

UK rates and bands apply to interest and dividends so you become a UK higher rate taxpayer (for interest and dividends only) at £50,270 regardless of what the Scottish thresholds are or what they are called

millymollymandy73

Thank you for your replies. I unhelpfully didn't realise that the Scottish tax rates had the same name but referring to a totally different number! So when I was saying that my new job would push me into higher rate tax, I meant that I would be over the higher rate threshold for the rest of the UK (as well as for Scotland). And I'm struggling to understand your responses 😕 Does that change your answers?

eskbanker

millymollymandy73 said:

Thank you for your replies. I unhelpfully didn't realise that the Scottish tax rates had the same name but referring to a totally different number! So when I was saying that my new job would push me into higher rate tax, I meant that I would be over the higher rate threshold for the rest of the UK (as well as for Scotland). And I'm struggling to understand your responses 😕 Does that change your answers?

If you're saying that your employment income will exceed £50,270, then (assuming it's still in five figures rather than six) you'll have a personal savings allowance of £500 (instead of the £1,000 applicable when a basic rate taxpayer), which has the effect of taxing the first £500 of your savings interest at 0%, while the rest of your (non-ISA) savings will be taxed at the higher rate.  In other words, if you want to avoid tax on your savings, keep the interest (outside ISAs) to no more than £500 over the tax year....

millymollymandy73

Thank you for giving me the dummies guide version 🙏 

millymollymandy73

So is it generally the case that any money that would take me over the £500 in interest personal savings allowance is better off being placed in an ISA? ie. Would earn more money that way than a regular saver?