What counts as income for the purposes of the starting savings rate allowance?

Gerbert

I have a question about how the starting savings rate allowance is affected (or not) by different kinds of 'income'.

My understanding is as follows.

1. If I am a basic rate taxpayer (20%), I can receive up to 1000 GBP in interest on savings each year (the personal savings allowance) without being taxed on it.  Anything above 1000 GBP/year is taxed at 20%.  (I understand that this allowance is reduced for higher and additional rate taxpayers, but that is not at issue here)

2. If my income is less than 12570 GBP/year, I also have a starting savings rate allowance of 5000 GBP which means that any interest I earn on savings up to 5000 GBP is not taxed.  This is in addition to the personal savings allowance (1000 GBP/year) above.  Any income above 12570 GBP/year reduces the starting savings rate allowance by an equivalent amount, so that eg if my income is 17570 GBP/year, I have no starting savings rate allowance remaining (though I do still have the 1000 GBP/year personal savings allowance as in (1.)).

My question is, what counts as 'income' here?

Obviously 'income' cannot refer to money which is already my own: if I withdraw money from a savings account, this is not income and there is no question of my paying tax on it.  Similarly if I withdraw money from an ISA.

But what if I draw down money from a pension (whether workplace pension or SIPP)?  I imagine that if the money drawn down is from the 75% taxable part of the pension, it does count as income.  But what if it is from the 25% non-taxable part?  Is that still income for the purposes of getting (or not getting) the starting savings rate allowance?  Or is it treated like money from a (similarly non-taxable) savings account or ISA?

Dazed_and_C0nfused

For most people it is earnings, pension income, business profits, rental income profit and taxable benefits paid by DWP.

Would HMRC even know about non taxable income 🤔

Gerbert

Well, non-taxable income is only non-taxable due to being granted this status by the HMRC/Government. And the non-taxable income in question is coming from a pension which has to comply with all sorts of HMRC/Government regulation, so I imagine they would want to know something about it. Wouldn't it have to be declared on a tax return? (Genuine question - this is just an assumption of mine)

Gerbert

For example, they would have to know when I had used up my 25% non-taxable portion. Or am I meant to work all this out myself and pay what seems right when it seems right? Sounds like a recipe for disaster…

sheramber

https://forums.moneysavingexpert.com/discussion/comment/81947347#Comment_81947347

The pension company know when when you have used up the 25% and will notify HMRC of any further payments.
. They will deduct tax , if appropriate, per any code number HMRC send them.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81947343#Comment_81947343

https://forums.moneysavingexpert.com/discussion/comment/81947347#Comment_81947347

Are you actually self-assessing currently or just hypothesising?

To be clear, income from ISAs and tax-free pension payments aren't declarable on tax returns and won't be subjected to tax if HMRC are doing the calculation themselves.

Gerbert

I haven't filled out a tax self-assessment for many years but am expecting to do so again soon when I begin taking my pension. But my question was not about whether tax-free pension payments are declarable on tax returns, but whether they count as income for the purposes of tax calculations involving the savings rate allowance. If they don't appear on tax returns, it's not clear to me how they could so count. Maybe that's the answer then: they don't.

I must admit that would surprise me. It would mean that I could receive the state pension, now almost exactly equal to the personal allowance (12570 GBP), and take say (untaxed) 30000 GBP/year from the 25% non-taxable pension drawdown (till it runs out obviously), and still have another 6000 GBP tax-free interest on savings to play with every year. That seems (dare I say: uncharacteristically) generous. But maybe that's right. Is that right?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81947451#Comment_81947451

You are overthinking this.

The savings starter rate is based on your (taxable) non savings non dividend income.

You might find this LITRG info useful.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-savings-income/starting-rate-savings

Gerbert

I may well be overthinking it, though it is equally possible that I am simply not understanding the sense here of 'taxable'. In that LITRG link (for which I thank you) the strapline does not mention 'taxable' at all: it just says the starting rate for savings "applies if your non-savings and non-dividend income is below a certain threshold.". In the Introduction it does then talk about "the first 5000 GBP of taxable income" but it then seems to contradict itself again when it says "the starting rate for savings will only apply to you if […] your earned income and other non-savings, non-dividend income […] is lower than a certain limit" - again, no mention of 'taxable' here.

The yellow box "Example - starting rate for savings" begins "Suppose, in 2025/26, you are not eligible for the blind person’s allowance, you have pension income of £13,000 and savings income of £2,000, so you will have total income of £15,000." But this doesn't help as it doesn't distinguish between pension income which is taxable (eg the State Pension, and/or the 75% taxable part of a DC pension) and the 25% non-taxable part of a DC pension. This is precisely the distinction I am talking about.

My question is whether the non-taxable 25% of a DC pension will 'eat away' at the starting savings rate allowance in the same way as the taxable part of a pension (or any other taxable income) does.

eskbanker

My question is whether the non-taxable 25% of a DC pension will 'eat away' at the starting savings rate allowance in the same way as any taxable part of a pension (or any other taxable income) does.

Answer: no.

Gerbert

Thank-you! I appreciate you were trying to guide me to a fuller understanding which would allow me to answer my own question myself, but sometimes there is no substitute for a clear binary answer.

I'm still surprised at the answer though.