Starter Savings Rate for higher rate tax

Mr_blibby

My father is a very cautious investor..his is retired, but has no income other than the interest payments from his savings (no pension, rental or dividend income).

I have a question about the use of the starter savings rate in the fortunate situation where the annual income from his savings will be over the higher rate 40% threshold.

This year his savings income will be c £53k. My question is on the use of the various allowances to calculate the tax due - as I understand it, the personal allowance £12570 is used first, then he could use the Starter savings allowance - as he no other income this would be £5000, then the personal savings allowance - is the total income is above the upper rate threshold, then this would be £500, giving a total of £18070 total allowances.

The remaining income would be £53000 - 18070 = £34930.

As this is below the basic rate band of £37700 (£50270-12570) does this mean that all the remaining income can be treated at 20% tax... or as the total income is above £50270, does he pay 40% on the £2730 over the upper rate threshold.

Hope I've explained it well enough ... Appreciate any thought on the tax treatment - I've already admonished him enough on diversification and increasing risk/reward

Thanks

Albermarle

The £5,000 starter savings rate only applies for people with income between £12570 and £17,570. ( the higher the income the less you can use of it)
Once your income goes above £17,570 it does not apply at all. 

So in your Fathers's case all interest above £12570 will be subject to tax, apart from the £500 personal savings allowance.

born_again

Any of his savings in ISA?

Mr_blibby

Albermarle said:

The £5,000 starter savings rate only applies for people with income between £12570 and £17,570. ( the higher the income the less you can use of it)
Once your income goes above £17,570 it does not apply at all. 

So in your Fathers's case all interest above £12570 will be subject to tax, apart from the £500 personal savings allowance.

Thanks - according to Gov site, only earned and divi income tapers the starter savings allowance - 

Mr_blibby

born_again said:

Any of his savings in ISA?

Some - not as much as he should, but moving £20k over a year... the income is from his non -ISA savings 

SacredStephan

Suggest the OP looks here, at the Cheryl example:
https://www.moneysavingexpert.com/savings/tax-free-savings/

eskbanker

Albermarle said:

The £5,000 starter savings rate only applies for people with income between £12570 and £17,570. ( the higher the income the less you can use of it)
Once your income goes above £17,570 it does not apply at all. 

So in your Fathers's case all interest above £12570 will be subject to tax, apart from the £500 personal savings allowance.

I asserted the same (wrongly) last week, and was corrected:

https://forums.moneysavingexpert.com/discussion/comment/81753210#Comment_81753210

https://www.gov.uk/guidance/check-how-much-tax-you-pay-on-dividends-and-interest-from-savings clarifies, and can be used by OP to ascertain the tax liability here....

FIREDreamer

Albermarle said:

The £5,000 starter savings rate only applies for people with income between £12570 and £17,570. ( the higher the income the less you can use of it)
Once your income goes above £17,570 it does not apply at all. 

So in your Fathers's case all interest above £12570 will be subject to tax, apart from the £500 personal savings allowance.

Are you sure?

He only has savings income, so presumably £17,570 is tax free?

If not …

(a) Only income is £17,570 savings interest - no tax due

(b) Only income is £17,571 savings interest - £12,570 plus £1,000 is tax free, but £800 tax would be due on the next £4,001

This cannot be correct?

SnowMan

The savings interest is all taxable income, but he benefits from the personal allowance, the starter savings 0% band that covers 5K of savings interest, and the savings interest falling within the £500 savings allowance being taxed at 0% 

So he pays 40% tax on £2,730 (= 53,000 - 50,270) 

and 20% tax on 32,200 (= 50,270 - 12,570 - 5,000 - 500)

See

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-savings-income

intalex

Mr_blibby said:

My father is a very cautious investor..his is retired, but has no income other than the interest payments from his savings (no pension, rental or dividend income).

I have a question about the use of the starter savings rate in the fortunate situation where the annual income from his savings will be over the higher rate 40% threshold.

This year his savings income will be c £53k. My question is on the use of the various allowances to calculate the tax due - as I understand it, the personal allowance £12570 is used first, then he could use the Starter savings allowance - as he no other income this would be £5000, then the personal savings allowance - is the total income is above the upper rate threshold, then this would be £500, giving a total of £18070 total allowances.

The remaining income would be £53000 - 18070 = £34930.

As this is below the basic rate band of £37700 (£50270-12570) does this mean that all the remaining income can be treated at 20% tax... or as the total income is above £50270, does he pay 40% on the £2730 over the upper rate threshold.

Hope I've explained it well enough ... Appreciate any thought on the tax treatment - I've already admonished him enough on diversification and increasing risk/reward

Thanks

I believe it should be, but please correct me if I'm wrong:
£12,570 @ 0% (personal allowance) => £0.00
£5,000 @ 0% (starting rate) => £0.00
£500 @ 0% (personal savings allowance) => £0.00
£32,200 @ 20% (basic rate) => £6,440
£2,730 @ 40% (higher rate) => £1,092
----------------------------------------------------------------------------
£53,000                              => £7,532

Edit: I'm actually not sure if the basic/higher rate components will be £32,200/£2,730 or £32,700/£2,230 as I'm not sure which end the personal savings allowance is taken away from, so...

£12,570 @ 0% (personal allowance) => £0.00
£5,000 @ 0% (starting rate) => £0.00
£500 @ 0% (personal savings allowance) => £0.00
£32,200 @ 20% (basic rate) => £6,440
£2,730 @ 40% (higher rate) => £1,092
----------------------------------------------------------------------------
£53,000                              => £7,532

OR

£12,570 @ 0% (personal allowance) => £0.00
£5,000 @ 0% (starting rate) => £0.00
£32,700 @ 20% (basic rate) => £6,540
£2,230 @ 40% (higher rate) => £892
£500 @ 0% (personal savings allowance) => £0.00
----------------------------------------------------------------------------
£53,000                              => £7,432

ColdIron

Albermarle said:

The £5,000 starter savings rate only applies for people with income between £12570 and £17,570. ( the higher the income the less you can use of it)
Once your income goes above £17,570 it does not apply at all

This isn't quite right, you need to define income. The Starting Rate for Savings can be used by anyone whose non-savings/non-dividend income (broadly earned income or pensions) is less than £17,570

Stack earned income and pension first then savings interest then dividends

If the earned income and pension is less than £12,570 then the whole SRS is available (for savings interest). If it's greater, then that reduces the SRS for each pound until £17,570 when it will all be used up

So in your Fathers's case all interest above £12570 will be subject to tax, apart from the £500 personal savings allowance.

Dad, whose only income is savings interest, will get the Personal Allowance, the Starting Rate for Savings and the applicable Personal Savings Allowance