Personal and savings tax allowance questions

HeadScratching

Having just retired I'm in new territory so would appreciate some advice on what are probably pretty basic questions, before I bother my very busy accountant...

This coming new tax year, and for the foreseeable future years, I anticipate being able to access savings interest of approx £40k per annum; I also receive full state pension, which will use up my annual personal income allowance. Am I right in thinking I will have £5k savings starter rate allowance, plus £1k personal savings allowance, so will end up paying 22% tax on £34k of savings interest? And as my annual savings interest income plus pension = £52k+ does that mean I am a 'higher earner' (so the PSA reduces to £500)?

In addition, my husband will have his own savings interest income of £40k, but no state pension. Am I right in thinking that he will be able to offset his £12.5k personal income allowance, his £5k savings starter rate allowance, plus £1k personal savings allowance, against his savings interest income so will pay 22% on £21.5k?

Neither of us have any other income. The savings interest income above excludes ISA interest income.

Advice on my maths and (mis)understanding of tax would be very welcome!

masonic

Savings interest tax rates remain at 20%/40% for the 2026/27 tax year and increase to 22%/42% in April 2027.

If your total income is more than £50,270 then some of that interest will be taxed at the higher rate and you will lose £500 from your PSA.

However, since you expect to earn £80k interest between the two of you, it would be possible to distribute your savings so that your husband earns £50k and you earn £30k, with both of you remaining basic rate taxpayers. That is probably the simplest option, and if interest rates continue to fall, may only be necessary temporarily.

HeadScratching

masonic said:

Savings interest tax rates remain at 20%/40% for the 2026/27 tax year and increase to 22%/42% in April 2027.

If your total income is more than £50,270 then some of that interest will be taxed at the higher rate and you will lose £500 from your PSA.

However, since you expect to earn £80k interest between the two of you, it would be possible to distribute your savings so that your husband earns £50k and you earn £30k, with both of you remaining basic rate taxpayers. That is probably the simplest option, and if interest rates continue to fall, may only be necessary temporarily.

This is absolutely the perfect layman's level of advice I was hoping for, thank you very much indeed.  I will do some judicious redistribution....

DRS1

That is a fairly hefty amount of savings income outside an ISA.  I assume you are maximising what you put in an ISA each year?

Do you need that amount of income?  If not:

Have you put £50k each into premium bonds?  The prizes are not reliable income but they are at least tax free.

Have you thought about low coupon gilts (with clean prices under 100)?  The coupons are taxable but the gain is free of CGT

HeadScratching

DRS1 said:

That is a fairly hefty amount of savings income outside an ISA.  I assume you are maximising what you put in an ISA each year?

Do you need that amount of income?  If not:

Have you put £50k each into premium bonds?  The prizes are not reliable income but they are at least tax free.

Have you thought about low coupon gilts (with clean prices under 100)?  The coupons are taxable but the gain is free of CGT

Yes, our ISAs are maxed each year, and we have also maxed our Premium Bonds - my ERNIE prizes run at 7%, my husband's at 1%. The savings income and pension let us retain our existing standard of living without being extravagant. I will look into low coupon gilts, I see MSE has a section on them! I have quite a steep learning curve ahead...  I've now got to get to grips with inheritance tax too....  Thank you for your advice.

kermchem

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

masonic

I would say on the low coupon gilt front, it is marginal for a basic rate taxpayer at current prices, but something to keep an eye on for the future. At times these can offer better overall value to a taxpayer than the best savings accounts for large sums.

Index linked gilts might still be worth some thought, as these are mostly low coupon and could address the inflation risk of remaining in cash, but add another layer of complexity due to the inflation linking. Again, probably not an immediate need to get to grips with as in the short term it is likely that after tax savings rates will beat inflation.

eskbanker

kermchem said:

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

OP's only non-interest income is the pension of roughly the £12,570 personal allowance, so the full starting rate for savings would be available?

fuzzzzy

You could pay £2880 into a SIPP every year until 75, to extend your basic rate band.

Eco_Miser

HeadScratching said:

Having just retired I'm in new territory so would appreciate some advice on what are probably pretty basic questions, before I bother my very busy accountant...

This coming new tax year, and for the foreseeable future years, I anticipate being able to access savings interest of approx £40k per annum; I also receive full state pension, which will use up my annual personal income allowance. Am I right in thinking I will have £5k savings starter rate allowance, plus £1k personal savings allowance, so will end up paying 22% tax on £34k of savings interest? And as my annual savings interest income plus pension = £52k+ does that mean I am a 'higher earner' (so the PSA reduces to £500)?

If your state pension (plus any other bits of non-savings, non-dividend taxable income, such as some incentive payments) exceeds your Personal Allowance, £12570, your Starter Rate allowance will be reduced by the excess, so unless your state pension exactly equals your Personal Allowance you won't get the full £5k.

DRS1

masonic said:

I would say on the low coupon gilt front, it is marginal for a basic rate taxpayer at current prices, but something to keep an eye on for the future. At times these can offer better overall value to a taxpayer than the best savings accounts for large sums.

Index linked gilts might still be worth some thought, as these are mostly low coupon and could address the inflation risk of remaining in cash, but add another layer of complexity due to the inflation linking. Again, probably not an immediate need to get to grips with as in the short term it is likely that after tax savings rates will beat inflation.

Yes I suppose I was looking at it from the perspective of someone brushing up against the higher rate threshold.  If you get a straight 4% income from a savings account that might push you over.  But if you buy a gilt and get say 1.25% income and say 2.8% capital gain (where the capital gain is tax free) then you could stay a basic rate taxpayer and get a better overall return.  You do need to bear in mind that the gain is only at maturity (or maybe if you sell).

Of course those are made up figures and finding such gilts at reasonable prices may not be easy given that private investors (especially higher rate taxpayers) have been buying these things for a few years now

ILGs are a different kettle of fish.  I don't find it at all easy to judge the sort of return you would get.  But there are some handy tools for building a gilt ladder of ILGs if that is of any interest, including this one
Gilt Ladder Builder · Streamlit
Just to say that may get you to a page for conventional gilts but there is a column to the left where you can change that to ILGs (and change other things to taste).

OP do you really not have a private pension as well as the state one?