40% tax rate below £20k

Candyjet

I have discovered a taxation anomaly which could affect both my wife and me, which results in a tax rate of 40% despite total income being less than £20,000.

 The situation arises with interest from savings of £6,000 and, in our case, pension and rental income around the personal allowance of £12,570. Two simple examples, checked on the HMRC Self Assessment  website, will demonstrate the situation.

 A combination of pension/rental income of £12,570 combined with savings interest of £6,000 results in a total income of £18,570 with no tax owing.

If however, pension income is increased by £1,000 to give a total pension/rental income of £13,570 with savings remaining at £6,000, this results in a tax liability of £400, which is 40% of the £1,000 increase.

 I've read in the past that the order in which the various allowances is applied can cause this. If so, how do I change the order or notify HMRC to do so when filling in my tax return?

Thanks,

CJ

Dazed_and_C0nfused

Candyjet said:

I have discovered a taxation anomaly which could affect both my wife and me, which results in a tax rate of 40% despite total income being less than £20,000.

 The situation arises with interest from savings of £6,000 and, in our case, pension and rental income around the personal allowance of £12,570. Two simple examples, checked on the HMRC Self Assessment  website, will demonstrate the situation.

 A combination of pension/rental income of £12,570 combined with savings interest of £6,000 results in a total income of £18,570 with no tax owing.

If however, pension income is increased by £1,000 to give a total pension/rental income of £13,570 with savings remaining at £6,000, this results in a tax liability of £400, which is 40% of the £1,000 increase.

 I've read in the past that the order in which the various allowances is applied can cause this. If so, how do I change the order or notify HMRC to do so when filling in my tax return?

Thanks,

CJ

Can you explain how changing the way the Personal Allowance is allocated would help in that scenario?

Jeremy535897

It's because your starting rate for savings is reduced by the extra pension income, so you pay 20% on the extra £1,000 pension income, and 20% on £1,000 of your savings. It has nothing to do with allocating your personal allowance.
https://www.moneysavingexpert.com/savings/tax-free-savings/

Candyjet

Thanks for the replies. Out of interest, I tried using HMRC's own tax checker,
and it comes up with a tax liability of £200 rather than the £400 when calculated via Self Assesment.

Is it not odd that there is an apparent 40% tax bracket for such a relatively low income?

Isthisforreal99

Candyjet said:

Is it not odd that there is an apparent 40% tax bracket for such a relatively low income?

Not really, no. As explained above it's 20% on the £1000 pension income and 20% on £1000 savings.

If you want the full benefit of the 0% rate have less non savings income.

sheramber

The i£1000 ncrease in the pension income means you lose    £1000 of savings rate of 0%.

Total Income is now too high to benefit from the whole £5000 @ 0%.

 20% tax is due on the increase in pension and , because you now  are entitled to £4000 savings  allowance  tax at 20% is  now charged on that extra £1000

Albermarle

Put more of your savings into an ISA ( one each ).