Is Martin Wrong about Savings Allowance Tax?

PixelPound

Isthisforreal99 said:

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.

If you are in the HR tax band your 0% tax on interest is £500, anything more is taxed (yes it makes sense that if you are just £30 above then £470 will be taxed at 20% and just £30 at 40%). However you are still taxed at above zero. Where as earning £50 less in interest means it is all done at 0%.

So yes it shouldn't be £800 after tax (at 40% on the £500) but be £894 (after tax of 20% on £470 and 40% on £30), which is still less than the £950 tax free if below the threshold.

jimjames

This is the link to the post by Martin I was referring to

https://www.facebook.com/share/v/1CbHZYVT8b/

masonic said:

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.

Thanks, while his overall point is correct the calculations aren't.

friolento

jimjames said:

This is the link to the post by Martin I was referring to

https://www.facebook.com/share/v/1CbHZYVT8b/

masonic said:

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.

Thanks, while his overall point is correct the calculations aren't.

Exactly.      

CrunchyNutCornflakes

In example 1, would pension contributions of > £30 reduce the tax on interest to 20%?

masonic

CrunchyNutCornflakes said:

In example 1, would pension contributions of > £30 reduce the tax on interest to 20%?

Pension contributions of >£30 have the effect of expanding the basic rate band, or reducing income (depending on whether a net pay contribution or salary sacrifice). This would mean the basic rate band covers all of the income and the tax would be zero due to the higher PSA, giving a better result than example 2.

clairec666

CrunchyNutCornflakes said:

In example 1, would pension contributions of > £30 reduce the tax on interest to 20%?

Yes. I think that was the point of the original Facebook post - to show the benefits of keeping your total income under £50000, for which pension contributions would be a useful method. The calculations were wrong, but the outcome is effectively the same.

Newly_retired

Gift Aiding also expands the basic rate band, and needn’t just be charitable giving, as membership subscriptions can sometimes be GiftAided. I would love to know how to calculate a figure to keep me out of losing my £1000 PSA.

Ch1ll1Phlakes

jimjames said:

This is the link to the post by Martin I was referring to

https://www.facebook.com/share/v/1CbHZYVT8b/

masonic said:

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.

Thanks, while his overall point is correct the calculations aren't.

The caption on this post has been updated to address the fact the calculations are incorrect. So clearly more on than person has realised this including Martin Lewis himself.

kkento

But are these solutions?
1-  Gift Aid so as to claim the 40% tax back, but I'm unsure how that affects the thresholds so you might still take a hit and the Gift will be money out of your pocket.
2  - Close account and open one paying interest after 5 April 2026, although this makes next years situation worse unless you promptly put more into an ISA next year
3-  If not used ISA already this year do so ASAP 
4 -  Be grateful you've got this dilemma and take the hit. 
5  - If (but probably isn't) winter fuel allowance is deemed taxable that will push up your income even though it will also be clawed back.

kkento

friolento said:

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:

But if your income without interest is below the Higher Rate Band would the tax produce a different calculation, I assume this was because your income already put you into higher rates whereas the discussion is about the critical amount of interest taking you just into higher rates.   Incomes typically between £35k and £50k