Starter Savings Rate for higher rate tax

eskbanker

intalex said:

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

The HMRC page linked above gives the answer:

Savings interest of £53,000

Rate	Taxable amount	Tax due
Basic (20%)	£32,200	£6,440.00
Higher (40%)	£2,730	£1,092.00
Additional (45%)	£0	£0.00
Total	£34,930	£7,532.00

SacredStephan

OP: Has your Dad made a personal pension contribution this tax year?

SnowMan

intalex said:

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

As on the LITRG link earlier, the personal savings allowance is applied first, then the starter savings rate and then the savings allowance and then interest above that is taxable at a non zero rate i.e 20% and 40%. It's your first calculation that is correct. The order here is:

The first £12,570 of savings interest is covered by the personal allowance (0%)

Then savings interest between £12,570 and £17,570 is covered by the starter savings band (0%)

Then savings interest between £17,570 and £18,070 is covered by the savings allowance (0%)

Then savings interest from £18,070 to £50,270 is taxed at 20%

Then savings interest between £50,270 and £53,000 is taxed at 40%.

intalex

I would have thought it's my latter calculation as I perceived personal savings allowance to be "disregarded" from the calcs (akin to ISA interest), and also thought this way the HR PSA allowance of £500 would yield the same £200 tax saving as the BR PSA allowance of £1000. Anyway, it is what it is, something learnt.

Dazed_and_C0nfused

intalex said:

I would have thought it's my latter calculation as I perceived personal savings allowance to be "disregarded" from the calcs (akin to ISA interest), and also thought this way the HR PSA allowance of £500 would yield the same £200 tax saving as the BR PSA allowance of £1000. Anyway, it is what it is, something learnt.

The savings starter rate band and savings nil rate band (aka Personal Savings Allowance) both use some of the basic rate band.  

So only £32,200 can be taxed at 20%, leaving £2,730 to be taxed at 40%.

For some people it would be possible to allocate the Personal Allowance in a different way so that the £500 doesn't use the basic rate band but as the only income in this instance is savings interest that isn't an option.

Mr_blibby

SacredStephan said:

OP: Has your Dad made a personal pension contribution this tax year?

He has, so I think that avenue has been explored....the other option I was thinking of exploring is whether a charitable donation could drop income below the 40% threshold and also bring the £1000 level PSA back into play instead of the £500 ?

Dazed_and_C0nfused

Mr_blibby said:

SacredStephan said:

OP: Has your Dad made a personal pension contribution this tax year?

He has, so I think that avenue has been explored....the other option I was thinking of exploring is whether a charitable donation could drop income below the 40% threshold and also bring the £1000 level PSA back into play instead of the £500 ?

As he has no income other than interest then he is limited to making a relief at source contribution of £3,600 (£2,880 from him plus £720 in basic rate tax relief the pension company will add).

That increases his basic rate band by £3,600 so if his total income is £53,000 he won't actually be a higher rate payer.

Albermarle

Mr_blibby said:

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 - 

I did not know that , so ignore my post.

Mr_blibby

Thanks for the comments and suggestions - unfortunately , the income was in 24/5 tax year so any additional pension contribution (or VCT) now cant be carried back to prior year, only EIS I think and thats going to be too long term and risky for his palate.

However, I still dont understand why this is incorrect 

Gross income £53000

He gets personal allowance of £12570, Plus the starter savings allowance of £5000 (as no tapering due to earned or divi income), Plus the £500 Personal savings allowance (as total income over £50,271)

Gross Income: £53,000

Total Allowances Deducted: £18,070 = £12,570+ £5,000 SRS+ 500 PSA

Net Taxable Income: £34930

 The Basic Rate (20%) applies to taxable income (after allowances), not gross income. up to £37,700 for the 2024/25 year

 £34,930 is obs less than £37700, so why is all that savings income not taxable at 20% at his marginal rate ?

Am I missing something ?

Dazed_and_C0nfused

Mr_blibby said:

Thanks for the comments and suggestions - unfortunately , the income was in 24/5 tax year so any additional pension contribution (or VCT) now cant be carried back to prior year, only EIS I think and thats going to be too long term and risky for his palate.

However, I still dont understand why this is incorrect 

Gross income £53000

He gets personal allowance of £12570, Plus the starter savings allowance of £5000 (as no tapering due to earned or divi income), Plus the £500 Personal savings allowance (as total income over £50,271)

Gross Income: £53,000

Total Allowances Deducted: £18,070 = £12,570+ £5,000 SRS+ 500 PSA

Net Taxable Income: £34930

 The Basic Rate (20%) applies to taxable income (after allowances), not gross income. up to £37,700 for the 2024/25 year

 £34,930 is obs less than £37700, so why is all that savings income not taxable at 20% at his marginal rate ?

Am I missing something ?

Yes.

In this situation the savings starter rate and savings nil rate (aka PSA) are both sat within the basic rate band so there is only £32,200 left where 20% tax will be applied.

Above that it will be 40%.