Mid year pay rise moving to higher income tax rate. What effect on interest earnings?

Watson_203

Hi all! I'm a teacher and my current salary puts me on the standard income tax rate currently.
If all goes well this year, I'll be getting a pay rise so I'll be earning just below the higher income tax rate, by £50 or so. This means I'll be able to earn £1000 of interest tax free, which I've already planned out with my savings.

There is a possibility however that there will be a general pay rise for all teachers this year, meaning that if I get my pay rise as well I'll definitely be in the higher income tax rate. My pay rise would begin in the December pay packet, but would be back paid to September.

My question is, If I do move up to the higher income tax rate, how will it effect the tax on the interest I have earned so far this year and will earn going forward?

Dazed_and_C0nfused

Watson_203 said:

Hi all! I'm a teacher and my current salary puts me on the standard income tax rate currently.
If all goes well this year, I'll be getting a pay rise so I'll be earning just below the higher income tax rate, by £50 or so. This means I'll be able to earn £1000 of interest tax free, which I've already planned out with my savings.

There is a possibility however that there will be a general pay rise for all teachers this year, meaning that if I get my pay rise as well I'll definitely be in the higher income tax rate. My pay rise would begin in the December pay packet, but would be back paid to September.

My question is, If I do move up to the higher income tax rate, how will it effect the tax on the interest I have earned so far this year and will earn going forward?

You can earn however much interest you want.

But if your total taxable income is above £50,270 and there are no other factors to take into account then you will only be getting £500 interest taxed at 0%.

Also, don't overcomplicate things, it's the tax year as a whole which matters.

Have you taken account of the fact that your taxable earnings will almost certainly be quite a bit less than your salary?

Kim_13

Watson_203 said:

Hi all! I'm a teacher and my current salary puts me on the standard income tax rate currently.
If all goes well this year, I'll be getting a pay rise so I'll be earning just below the higher income tax rate, by £50 or so. This means I'll be able to earn £1000 of interest tax free, which I've already planned out with my savings.

There is a possibility however that there will be a general pay rise for all teachers this year, meaning that if I get my pay rise as well I'll definitely be in the higher income tax rate. My pay rise would begin in the December pay packet, but would be back paid to September.

My question is, If I do move up to the higher income tax rate, how will it effect the tax on the interest I have earned so far this year and will earn going forward?

If a pay rise would take you £50 or so below the higher rate threshold, then you can only earn £50 of taxable interest before entering the higher rate tax band and having your PSA cut to £500 - so you may need to do some further planning to keep your interest within the £500 0% band that would then apply. ISA and Premium Bond returns often beat the after tax returns on normal savings for higher rate taxpayers.

Your total taxable income (including interest) determines your tax band, not just your salary. Salary sacrifice into a pension can be used to reduce your taxable income.

Brie

Don't forget that if you put some of that extra into your pension you won't be paying tax on it.  Might be something to consider!!

Alexland

Unless you really need the money now I'd echo looking at your pension options.

A pension defers the income until it can hopefully be drawn at a lower rate (and with growth) in retirement.

Are you making the most of any options you may have to contribute into your current pension scheme?

Is it worth parallel contributing into a new pension? If so don't forget to claim the higher rate tax back.

GrumpyDil

Without actual figures on current salary and potential new salary it's impossible to provide a response given it is possible that the OP won't exceed the 20% band this year. 

Watson_203

Thank you for all your replies! I'd not thought about interest being income on top of my salary and also that pension, NI and student finance would be untaxed.

Looking at the MSE Income Tax Calculator my "Taxable Wage" would be around £34,000 with a guesstimation of what my pay rises will roughly end up looking like. Therefore I should always be in the regular income tax threshold and this whole thing isn't even a problem.

Thanks again for your help and suggestions!

Kim_13

Watson_203 said:

Thank you for all your replies! I'd not thought about interest being income on top of my salary and also that pension, NI and student finance would be untaxed.

Looking at the MSE Income Tax Calculator my "Taxable Wage" would be around £34,000 with a guesstimation of what my pay rises will roughly end up looking like. Therefore I should always be in the regular income tax threshold and this whole thing isn't even a problem.

Thanks again for your help and suggestions!

If I’m not mistaken Student Loan Repayments don’t reduce your taxable earnings - but your payslip should say what your taxable pay to date is. Add that figure to any taxable interest, dividends etc received since April 6th and that would be your taxable income for 25/26 to date.

Watson_203

Kim_13 said:

Watson_203 said:

Thank you for all your replies! I'd not thought about interest being income on top of my salary and also that pension, NI and student finance would be untaxed.

Looking at the MSE Income Tax Calculator my "Taxable Wage" would be around £34,000 with a guesstimation of what my pay rises will roughly end up looking like. Therefore I should always be in the regular income tax threshold and this whole thing isn't even a problem.

Thanks again for your help and suggestions!

If I’m not mistaken Student Loan Repayments don’t reduce your taxable earnings - but your payslip should say what your taxable pay to date is. Add that figure to any taxable interest, dividends etc received since April 6th and that would be your taxable income for 25/26 to date.

You're right, student loads don't reduce them! I just lumped it in with the stuff that does.

Even then I still think my taxable earnings will still be very much below the higher threshold.

This all started because I failed to read "taxable" on the income tax table.

Thanks again!

Dazed_and_C0nfused

Watson_203 said:

Kim_13 said:

Watson_203 said:

Thank you for all your replies! I'd not thought about interest being income on top of my salary and also that pension, NI and student finance would be untaxed.

Looking at the MSE Income Tax Calculator my "Taxable Wage" would be around £34,000 with a guesstimation of what my pay rises will roughly end up looking like. Therefore I should always be in the regular income tax threshold and this whole thing isn't even a problem.

Thanks again for your help and suggestions!

If I’m not mistaken Student Loan Repayments don’t reduce your taxable earnings - but your payslip should say what your taxable pay to date is. Add that figure to any taxable interest, dividends etc received since April 6th and that would be your taxable income for 25/26 to date.

You're right, student loads don't reduce them! I just lumped it in with the stuff that does.

Even then I still think my taxable earnings will still be very much below the higher threshold.

This all started because I failed to read "taxable" on the income tax table.

Thanks again!

Taxable has different meanings.

Some people ignore the Personal Allowance when stating what their taxable income is.  But that would give an incorrect figure in most people's eyes.

So is your taxable wage genuinely around £34,000 or is it really ~£46.5k? 

Your payslips almost certainly show your taxable wage (pay).  

HedgehogRulez

Ask for a pay cut?