Is Martin Wrong about Savings Allowance Tax?

jimjames

Martin has posted on Facebook with an example of tax paid for someone earning just over the higher rate threshold with the claim that earning more means it's better to earn less interest. I'm not sure if his calculations are wrong. 

Example 1

Earnings £49300, interest earned £1000. Total income £50300 (£30 above HR) so therefore only £500 tax free interest and he says the remaining £500 is taxed at 40% so net interest earned is £800.

Example 2

Earnings £49300, interest earned £950. Total income £50250 (below HR) and therefore all the £950 is tax free and net interest £950.

That makes no sense to me. In example 1, yes the HR kicks in which means you only get £500 tax free but you're not taxed on the other £500 at 40%, £470 of it will be taxed at 20% (£376) and only the £30 over the HR limit is taxed at 40% giving £18. So instead of earning £300 as he suggests it's actually £376 +£18 = £394 meaning your total interest is £894. Is that right?

Yes it's still lower than earning £950 interest but not as much as Martin claims but with a different calculation.

Does anyone else agree? Or have I misunderstood? It seems very unlike Martin to post something apparently so wrong on a public forum.

Isthisforreal99

Don't have time tonight to run the figures but you may have made the mistake of saying the Personal Savings Allowance of £500 in example 1 is 'tax free. It's not it's a 0% rate, an important difference and that 0% rate may use the balance of the available basic rate band, leaving the balance of the interest taxable at 40%.

Which may or may not be correct, will confirm tomorrow.

jimjames

Isthisforreal99 said:

Don't have time tonight to run the figures but you may have made the mistake of saying the Personal Savings Allowance of £500 in example 1 is 'tax free. It's not it's a 0% rate, an important difference and that 0% rate may use the balance of the available basic rate band, leaving the balance of the interest taxable at 40%.

Which may or may not be correct, will confirm tomorrow.

Ah ok. Yes that would certainly make sense if that was the case.

DRS1

Isthisforreal99 said:

Don't have time tonight to run the figures but you may have made the mistake of saying the Personal Savings Allowance of £500 in example 1 is 'tax free. It's not it's a 0% rate, an important difference and that 0% rate may use the balance of the available basic rate band, leaving the balance of the interest taxable at 40%.

Which may or may not be correct, will confirm tomorrow.

I don't think so - including the full £1000 only takes you to £30 above the higher rate threshold.  So the OP is right.  But I am sure there have been other posts about this cut off and the result is not always the obvious one.

friolento

You are correct, @jimjames (apart from the terminology around the PSA). Savings interest is taxed separately from other income, with £500 being taxed at 0%, and the rest at 40% for an HR tax payer.

This is an extract from my last year's HMRC calculation:

masonic

I agree that with £1000 of savings income, £500 of the interest would be taxed at 0% (taking total income to £49,800), £470 at 20% (taking total income to £50,270) and therefore the final £30 is taxed at 40%. So £106 of extra tax for £50 of extra income, which is worse by £56.

Isthisforreal99

DRS1 said:

Isthisforreal99 said:

Don't have time tonight to run the figures but you may have made the mistake of saying the Personal Savings Allowance of £500 in example 1 is 'tax free. It's not it's a 0% rate, an important difference and that 0% rate may use the balance of the available basic rate band, leaving the balance of the interest taxable at 40%.

Which may or may not be correct, will confirm tomorrow.

I don't think so - including the full £1000 only takes you to £30 above the higher rate threshold.  So the OP is right.  But I am sure there have been other posts about this cut off and the result is not always the obvious one.

Yeah, I skim read the actual figures and agree it shouldn't be possible to tax £500 at higher rate when only £30 over the higher rate threshold.

DRS1

@friolento That is true where your pay etc has taken you into the higher rate already but on the OP's figures that hasn't happened.  It is only the last bit of savings income which crosses the threshold.

friolento

DRS1 said:

@friolento That is true where your pay etc has taken you into the higher rate already but on the OP's figures that hasn't happened.  It is only the last bit of savings income which crosses the threshold.

Your £500 still get taxed at 0%.

DRS1

friolento said:

DRS1 said:

@friolento That is true where your pay etc has taken you into the higher rate already but on the OP's figures that hasn't happened.  It is only the last bit of savings income which crosses the threshold.

Your £500 still get taxed at 0%.

The first £500 gets taxed at 0%.  It is the second £500 the OP is talking about.  Martin Lewis appears to have said the lot is taxed at 40% when only the final £30 is taxed at 40% and the other £470 is taxed at 20%.

Kim_13

friolento said:

DRS1 said:

@friolento That is true where your pay etc has taken you into the higher rate already but on the OP's figures that hasn't happened.  It is only the last bit of savings income which crosses the threshold.

Your £500 still get taxed at 0%.

In Example 1 only getting £500 taxed at 0% means that income is £49,300 + £894 net interest = £50,194. 

Example 2's equivalent figure stays at £50,250 so this is one case where it simply isn't worth crossing into higher rate tax, as the tax bill increases without the earner seeing any benefit from their increased earnings.