Tax on savings interest

PawelK

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Dazed_and_C0nfused

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

surreysaver

Don't forget that you need to add interest earned to your taxable income too (unless its in an ISA). This could tip you into the 40% bracket if you're close to it 

PawelK

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

PawelK

surreysaver said:

Don't forget that you need to add interest earned to your taxable income too (unless its in an ISA). This could tip you into the 40% bracket if you're close to it 

I haven't earned enough to make this difference although it was just over 1k so I was expecting to only be taxed on whatever was over 1k at 20% but it looks like my pension contributions didn't make any difference in this regard. 

Dazed_and_C0nfused

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

Salary sacrifice is where you don't contribute to a pension so there is nothing for you to claim or tell HMRC about.

You are agreeing to a reduced salary in return for extra employer contributions.  But as you don't have that salary anymore you don't pay tax (or NI) on it.

Have you checked your pension account to make sure employer contributions, with no pension tax relief, are being added?

Is it possible that your salary is closer to £70k and post sacrifice the £59k is correct?

What do your payslips show?  Maybe your employer has made a mistake processing the payroll?

phlebas192

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

There's your problem. Higher rate tax kicks in at £50,270 so if you've got £51k of income then you only qualify for the £500 PSA.

PawelK

Dazed_and_C0nfused said:

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

Salary sacrifice is where you don't contribute to a pension so there is nothing for you to claim or tell HMRC about.

You are agreeing to a reduced salary in return for extra employer contributions.  But as you don't have that salary anymore you don't pay tax (or NI) on it.

Have you checked your pension account to make sure employer contributions, with no pension tax relief, are being added?

Is it possible that your salary is closer to £70k and post sacrifice the £59k is correct?

What do your payslips show?  Maybe your employer has made a mistake processing the payroll?

Thank you for your reply. No, my gross salary was around 59k and my monthly pay slips were always showing my 14% contributions deducted from gross. That was making my monthly taxable pay around 4.2k instead of 4.9k so in 12 months time I expected it to be around 50k (4.2x12).

Newbie_John

£40k salary and you can get £1000 interest free.
£60k salary and you can get £500 interest free.

It gets tricky in-between, as interests earned count towards "salary" so:
£49500 and £1000 interests = £50500 income - so o er the threshold and your limit is £500 and 40% tax above that.

ISA is your solution, no matter how much interests you earn, you can top up£20k a year now, then again £20k from April.. and you won't be taxed.

PawelK

phlebas192 said:

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

There's your problem. Higher rate tax kicks in at £50,270 so if you've got £51k of income then you only qualify for the £500 PSA.

You might be right as for some reason I thought the higher rate kicks in around 52k! My bad, having just checked it means I have to either move more to my pension (which I am doing now anyway at 20%) or consider stocks and shares ISA. 

PawelK

Newbie_John said:

£40k salary and you can get £1000 interest free.
£60k salary and you can get £500 interest free.

It gets tricky in-between, as interests earned count towards "salary" so:
£49500 and £1000 interests = £50500 income - so o er the threshold and your limit is £500 and 40% tax above that.

ISA is your solution, no matter how much interests you earn, you can top up£20k a year now, then again £20k from April.. and you won't be taxed.

Thank you. ISA already used up and premium bonds too although the latter is probably worse than going through normal best paying savings accounts and sharing the interest (tax) with Rachel. 😆