Savings Interest, Tax and Pension contributions.

Organgrinder

I can't seem to find the answer to this so if anyone can help it would be appreciated.

I'm a higher rate tax payer (not by a huge amount) and claw back any higher rate tax by paying into a personal pension.

I also have savings (mostly ISAs split between me and my wife).

I'm aware I have a £500 limit on the interest earned on savings outside of my ISAs.

If I earn £1000 in interest outside of my ISAs, can the taxable £500 be reduced in effect to zero through increasing my pension contributions?

Thanks in advance.

Dazed_and_C0nfused

Organgrinder said:

I can't seem to find the answer to this so if anyone can help it would be appreciated.

I'm a higher rate tax payer (not by a huge amount) and claw back any higher rate tax by paying into a personal pension.

I also have savings (mostly ISAs split between me and my wife).

I'm aware I have a £500 limit on the interest earned on savings outside of my ISAs.

If I earn £1000 in interest outside of my ISAs, can the taxable £500 be reduced in effect to zero through increasing my pension contributions?

Thanks in advance.

There is no such limit like that, you could have £500, £5,000 or £50,000.

You can never reduce the amount of interest that is taxable by making extra pension contributions.  But you can change the amount of taxable interest that will be taxed at 0%.

In your situation are you sure you don't already get £1,000 taxed at 0%?

DRS1

Organgrinder said:

I can't seem to find the answer to this so if anyone can help it would be appreciated.

I'm a higher rate tax payer (not by a huge amount) and claw back any higher rate tax by paying into a personal pension.

I also have savings (mostly ISAs split between me and my wife).

I'm aware I have a £500 limit on the interest earned on savings outside of my ISAs.

If I earn £1000 in interest outside of my ISAs, can the taxable £500 be reduced in effect to zero through increasing my pension contributions?

Thanks in advance.

I hope you're not thinking of taking money out of an ISA and relying on some nil rate band.  It seems to me it would be easier to remove the nil rate band than ISA status.

Organgrinder

Sorry I meant £500 allowance on the tax free amount.

No I'm not thinking of taking money out of an ISA. I am at my limit.

So I'll rephrase my question.

If I earn £1000 in interest on non ISA savings my understanding is that £500 of this is taxed at 40%. If I were to increase my pension contributions would that reduce my tax liability?

Dazed_and_C0nfused

Organgrinder said:

Sorry I meant £500 allowance on the tax free amount.

No I'm not thinking of taking money out of an ISA. I am at my limit.

So I'll rephrase my question.

If I earn £1000 in interest on non ISA savings my understanding is that £500 of this is taxed at 40%. If I were to increase my pension contributions would that reduce my tax liability?

Potentially yes.  But without some proper details it's impossible to say with any certainty.

What is the total of all your taxable income?  Remember non ISA interest will all be taxable.

How much is the total gross amount of any relief at source pension contributions you expect to make in this tax year?

DRS1

I'm a higher rate tax payer (not by a huge amount) and claw back any higher rate tax by paying into a personal pension.

This makes me think you are contributing enough to get you back to being a basic rate taxpayer.  But when you calculate the amount of your pension contribution do you look at your total taxable income (including savings interest from non ISAs) or just your pay?  Hint it should be the total and that total includes anything which may be in a nil rate income tax band like interest or dividends.

Organgrinder

Yes I look at all my taxable income and pay an amount into my pension that in effect make me a basic rate tax payer.

Dazed_and_C0nfused

Organgrinder said:

Yes I look at all my taxable income and pay an amount into my pension that in effect make me a basic rate tax payer.

Not quite sure what the point of your original post was then 🤔

singhini

When you say "paying into a personal pension" is that after tax has been paid (which is not tax efficient or are you making salary sacrifice contributions before tax which is tax efficient)? 

Organgrinder

Because I don't want to pay 40%. I have come into some money and want to ensure that any interest earned over the next 5 months is taxed as low as possible.  If what you are saying is I can now earn £1000 in interest tax free if pay sufficient into my pension to keep me a basic rate payer then happy days. Ordinarily I'm about £8k into the higher rate but pay none due to my pension contributions.

singhini

Organgrinder said:

Yes I look at all my taxable income and pay an amount into my pension that in effect make me a basic rate tax payer.

Therefore your not a 40% tax payer and so your savings allowance is NOT £500