Staying below the 40% threshold

Newly_retired

Last tax year I paid tax at rates no higher than 20%. My estimated tax bill for 2025 -2026 shows a small amount taxable at 40%. However this is based on estimates of my Savings interest, which will be lower as interest rates have dropped, and there is an adjusted income because of Gift Aid. I expect my Gift Aided sum to remain roughly the same but there is scope for variation.
Is there a formula or set of figures I can apply to ensure I do not reach the 40 tax band? I do not want my Personal Savings Allowance to be reduced from £1000 to £500 if it can be avoided.
For further information I am already retired and in receipt of various pensions so salary sacrifice is irrelevant here.

leosayer

There's no magic formula, you just need to add up your income and make projections for future income.

Here's a few thoughts:
- Could you transfer your savings to a spouse or an ISA?
- Have you made a £3,600 pension contribution this year? Retirees can do this and it will extend your basic rate tax band
- Can you adjust your pension income? Eg. by reducing your drawdown

If those options are not possible then charitable contributions is a great way of doing it!

Dazed_and_C0nfused

Newly_retired said:

Last tax year I paid tax at rates no higher than 20%. My estimated tax bill for 2025 -2026 shows a small amount taxable at 40%. However this is based on estimates of my Savings interest, which will be lower as interest rates have dropped, and there is an adjusted income because of Gift Aid. I expect my Gift Aided sum to remain roughly the same but there is scope for variation.
Is there a formula or set of figures I can apply to ensure I do not reach the 40 tax band? I do not want my Personal Savings Allowance to be reduced from £1000 to £500 if it can be avoided.
For further information I am already retired and in receipt of various pensions so salary sacrifice is irrelevant here.

What do you expect your total taxable income to be for 2025-26?

Gift Aid donations do not impact this figure and I do mean total, not an amount net of any so called "allowances".

KidJo

The best place remains inputting your figures into the HMRC calculator.

I couldn't find too much help online where I needed to include interest in the calculations so I have been working on my own one - you can give it a go and see if it works for you. Drop down on the "Advanced Options" to access pensions received and charitable donations - then open up the Income Tax amount to see how it fills the tax bands/ how charitable donations expand the basic rate band etc...
https://taxgrid.co.uk

Dazed - you've seen this before a few months ago - any feedback from you is always welcome.

Newly_retired

Thank you for your replies.
i have to complete Self Assessment because of a tiny foreign pension, but of course I also input my savings interest. I pay what is owed rather than have it collected by PAYE. 

leosayer, no I cannot transfer savings to a spouse and I have used my ISA allowance for this year.
I cannot adjust any of my pensions. 
I could Gift Aid more but only if it benefits me (as well as the charities.)

I could choose to spend more of my savings, reducing the amount attracting interest. 

If I understand the system correctly, my Gift Aiding affects my tax situation only if it would reach the 40% band. I think,  if I have understood correctly, that will be determined by interest rates on savings which I can’t predict.

My income from all sources for 2024-2025 was £52301, but my taxable income was £39,073 after deduction of my Personal Allowance of £12570.
My basic rate limit was increased by £2657 to £40357 for Gift Aid payments. 
My savings interest was  £3658, taxed at 20%, = £731, after the £1000 tax free savings allowance. 

I did not pay any tax at 40%.
I’d need to log in to my Gov Gateway account to provide their estimate of figures for this tax year. The savings income will definitely be less they are predicting as interest rates have dropped. Pensions have increased in line with various %. A small amount of my income is estimated to come into the 40% band, but I don’t know how to work out at what point my £1000 savings allowance is reduced to £500. I don’t want to be in the small minority who are worse off by having more savings income, so if I can prevent that by increasing my GA, I will. 

KidJo

Firstly, keep it simple. Ignore your personal allowance here - its irrelevant.
The number you need to watch is £50,270. The moment your total income goes over this you lose £500 shield on interest.
So say your earnings go to £53,000 and your interest goes down to £3000. 
The formula you need is £53,000 + £3,000 = £56,000, so you have £5,730 poking up into the higher bracket, therefore gift away at least £4,584 (Gross up to £5,730) which keeps you out of the higher band.

KidJo

One more thing - ignore me if I'm going off piste, but are sure you didn't pay tax at 40% last year on your savings - here's a thought.
There may have been optimisation of your personal allowance where HMRC calculator allocated £11,248 to non-savings income and £1,322 to Savings income and your tax would have been:
Non savings
£40,395 x 20% = £8,079
Savings
£500 x 0% 
£1,836 x 40% = £734 
which may have been confused with this statement from you
"My savings interest was  £3658, taxed at 20%, = £731, after the £1000 tax free savings allowance. "
Worth double-checking, I would

Newly_retired

KidJo said:

One more thing - ignore me if I'm going off piste, but are sure you didn't pay tax at 40% last year on your savings - here's a thought.
There may have been optimisation of your personal allowance where HMRC calculator allocated £11,248 to non-savings income and £1,322 to Savings income and your tax would have been:
Non savings
£40,395 x 20% = £8,079
Savings
£500 x 0% 
£1,836 x 40% = £734 
which may have been confused with this statement from you
"My savings interest was  £3658, taxed at 20%, = £731, after the £1000 tax free savings allowance. "
Worth double-checking, I would

Well I was quoting from HMRC’s tax calculation sheet. 

Dazed_and_C0nfused

Newly_retired said:

Thank you for your replies.
i have to complete Self Assessment because of a tiny foreign pension, but of course I also input my savings interest. I pay what is owed rather than have it collected by PAYE. 

leosayer, no I cannot transfer savings to a spouse and I have used my ISA allowance for this year.
I cannot adjust any of my pensions. 
I could Gift Aid more but only if it benefits me (as well as the charities.)

I could choose to spend more of my savings, reducing the amount attracting interest. 

If I understand the system correctly, my Gift Aiding affects my tax situation only if it would reach the 40% band. I think,  if I have understood correctly, that will be determined by interest rates on savings which I can’t predict.

My income from all sources for 2024-2025 was £52301, but my taxable income was £39,073 after deduction of my Personal Allowance of £12570.
My basic rate limit was increased by £2657 to £40357 for Gift Aid payments. 
My savings interest was  £3658, taxed at 20%, = £731, after the £1000 tax free savings allowance. 

I did not pay any tax at 40%.
I’d need to log in to my Gov Gateway account to provide their estimate of figures for this tax year. The savings income will definitely be less they are predicting as interest rates have dropped. Pensions have increased in line with various %. A small amount of my income is estimated to come into the 40% band, but I don’t know how to work out at what point my £1000 savings allowance is reduced to £500. I don’t want to be in the small minority who are worse off by having more savings income, so if I can prevent that by increasing my GA, I will. 

What HMRC have estimated your income as isn't really of any relevance.

You should know far better than HMRC what your total taxable income is going to be.  HMRC only know what income you have already received, and use that to inform their estimates for the current tax year.

The simple answer is you calculate your tax liability ignoring the savings and dividends nil rate bands. 

If that shows you are a higher rate payer then you can incorporate (upto) £500 of savings nil rate band into the calculation.  If it shows you aren't a higher rate payer you incorporate (upto) £1,000 of savings nil rate band into the calculation.