Tax on Savings Interest

236dave

Hi,
I'd like to understand how HMRC charge tax on savings interest, with regard to the example attached.  I've read this https://www.gov.uk/apply-tax-free-interest-on-savings and see that low earners can get the starting rate for savers plus the personal savings allowance.

The example is for my wife who is earning £3,000-£5,000 per year, but her untaxed interest has been deducted from their personal allowance, why?

I realise that she is still well within her allowance, so won't pay tax, but why is the savings interest deducted from her personal allowance, when their is a starting rate for savers and a personal savings allowance?

Isthisforreal99

You  cover any income with personal allowances before any rates, including savings rates, come into play so in your wife's case all income seems to be covered by personal allowances and will pay no tax. If she had earnings of say £13,000 HMRC would not include the restriction.

As an aside, the personal savings allowance is not an allowance, it's a 0% rate band, which again only comes into play if you have income in excess of the personal allowance.

Dazed_and_C0nfused

236dave said:

Hi,
I'd like to understand how HMRC charge tax on savings interest, with regard to the example attached.  I've read this https://www.gov.uk/apply-tax-free-interest-on-savings and see that low earners can get the starting rate for savers plus the personal savings allowance.

The example is for my wife who is earning £3,000-£5,000 per year, but her untaxed interest has been deducted from their personal allowance, why?

I realise that she is still well within her allowance, so won't pay tax, but why is the savings interest deducted from her personal allowance, when their is a starting rate for savers and a personal savings allowance?

It's because those 0% tax bands are only available once her Personal Allowance (£11,310 or £12,570) has been used.

So if her only other income is £3-5k in earnings then she has a lot of Personal Allowance to use before she can benefit from the savings starter rate or savings nil rate (aka Personal Savings Allowance).

This is the thread from when you asked this in 2023.  Nothing has changed since then.

https://forums.moneysavingexpert.com/discussion/6440637/untaxed-interest-on-savings-and-investments

Kim_13

This is how the system works but I do think it could be done better. HMRC also forward estimate, so someone being fiscal dragged into being a basic rate taxpayer is going to get there sooner due to HMRC estimating they'll owe tax on the same interest in the next tax year - when there will be 0% bands available. Someone earning around say £12,000 is the least able to afford having tax taken off and then refunded once HMRC catch up and realise the interest should have been taxed at 0%.