Income tax on Savings

rightfoot_shifter

I've had a bit of a shock from an HMRC tax change notification, classing me as marginally above the 40%tax threshold. The only thing I can think of is savings that are taxable but I am unsure that is the case. 

My earned income this year is just below the 40% tax threshold. So shouldn't the tax exempt savings allowance still qualify as £1000, even though my savings, outside ISA, exceed £1000? It seems HMRC are taking the savings interest as the element pushing my income above the 40% threshold. Consequently HMRC have dropped my tax exempt savings allowance to £500!!

Can someone kindly comment if I am at fault or HMRC?

FrugaiMacDugal

From HMRC, your interest is added to your earned income.,

To work out your tax band, add all the interest you’ve received to your other income.

Income Tax band	Personal Savings Allowance
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

Link.

SacredStephan

rightfoot_shifter said:

Can someone kindly comment if I am at fault or HMRC?

I'm assuming you are not in Scotland.
HMRC appear to have correctly determined that you are a HR taxpayer because your total income (earnings + savings) exceeds the HR threshold. The top slice of your savings will be taxed at 40%, there may be a middle slice taxed at 20% and the bottom slice (£500) will be taxed at 0%. You can take yourself out of HR tax by making a pension contribution (or an extra pension contribution) before 5th April. If you are already making relief at source pension contributions and have not notified HMRC about them, you should do so and this may also take you out of HR tax.

Dazed_and_C0nfused

rightfoot_shifter said:

I've had a bit of a shock from an HMRC tax change notification, classing me as marginally above the 40%tax threshold. The only thing I can think of is savings that are taxable but I am unsure that is the case. 

My earned income this year is just below the 40% tax threshold. So shouldn't the tax exempt savings allowance still qualify as £1000, even though my savings, outside ISA, exceed £1000? It seems HMRC are taking the savings interest as the element pushing my income above the 40% threshold. Consequently HMRC have dropped my tax exempt savings allowance to £500!!

Can someone kindly comment if I am at fault or HMRC?

No, you appear to have misunderstood how tax on interest works.

Step 1 - check if you are a basic, higher or additional rate payer or not.

Step 2 - using result from step 1 determine your savings nil rate band (1000, 500 or 0)

Step 3 - recalculate your liability to incorporate the savings nil rate band.  Which if some or all of it falls in the basic rate band is deemed to have used that part of your basic rate band.