Tax on savings and pension drawdown

hotchillies

I will have received about £8k in savings interest in the 2025-26 tax year. I am not getting state pension just yet and have no other income. I have already taken my tax-free lump sum from my pension. I need to decide how much to draw down from my crystallised private pension pot in this tax year, before 5th April. I know I will get £1k allowance plus extra £5k allowance if my total income does not exceed £18,570. I could take up to £10,570 as drawdown and that would mean I stay below £18,570 so pay no tax at all but ideally would like to take a few thousand more. I am prepared to pay 20% tax on this extra but I am worried it may in practice be more than 20%.

It seems to me that if my total income goes above £18570 I will have an effective tax rate of 40% for the next £5k as I will lose £1 of tax-free-interest allowance for each extra £1 drawn down so will pay 20% on the otherwise tax-free interest plus another 20% on the extra pound drawn down. So 40p tax for every pound earned between £18570 and £23570. Am I correct? If my analysis is correct then above £23570 the incremental rate would return to £20% until I reach the 40% threshold. Have I misunderstood something as if I am correct then I am surprised that I cannot find this issue discussed anywhere else.

Albermarle

 I know I will get £1k allowance plus extra £5k allowance if my total income does not exceed £18,570.

You have misunderstood how the savings starter rate works.

First you have your personal allowance of £12570. Then the starter savings rate of £5K . However as your taxable income goes above £12570, it starts to reduce the starter savings rate.

So for example if took £15, 570 from your pension, then only £2000 of the saver starting rate remains + the £1000 personal savings allowance.

So would be taxed on £3K of income and on £5K of your savings interest.

DRS1

Sounds like you are in a fortunate position as you can control your non savings non dividend income - most people can't.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81900463#Comment_81900463

Savings interest (outside ISAs) is taxable income, so:

However as your taxable non-savings non-dividend income goes above £12570, it starts to reduce the starter savings rate.

So for example if took £15, 570 from your pension, then only £2000 of the saver starting rate remains + the £1000 personal savings allowance.

So would be taxed on £3K of pension income and on £5K of your savings interest.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6657026/tax-on-savings-and-pension-drawdown

An effective rate of 40% tax is possible in this situation.

Is Marriage Allowance something you need to take account of?

hotchillies

https://forums.moneysavingexpert.com/discussion/comment/81900486#Comment_81900486

thanks. I think I’m still struggling to understand.

if say I draw down £12,570 then that is all tax free and I get the full £5k interest allowance plus £1k so I will pay 20% tax on £2,000 - so £400.

But if instead I draw down £13,570 then £1,000 of that is taxable and I get only £4k interest allowance plus £1k so I will pay 20% tax on £3,000. So I would pay 20% tax on £2k more than the previous example yet have only received £1,000 more. So an additional £400 tax on £1,000 drawdown. An effective tax rate of 40%. Am I wrong?

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81900628#Comment_81900628

No, not wrong, that's how it works, hence the post immediately before that one!

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81900628#Comment_81900628

It is probably easier to think about the £5K savings starter rate as a generous concession for people with low incomes. This concession disappears as your taxable income goes up.

There are also ISAs of course.