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

eskbanker

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

Out of curiosity, why?

sheramber

https://forums.moneysavingexpert.com/discussion/comment/81947527#Comment_81947527

It is NON taxable therefore HMRC are not interested in it.

cc123mm456

It is frequently discussed over on the pensions board, that there are people taking early retirement, and want to fill in the gap between their retirement date and state pension age with some small income from a DC pension or SIPP, then top it up with income from savings.

The usual recommendation for that scenario is to take from the pension £16,760 per annum. Made up of 25% tax free lump sum, with the remaining 75% taxable being equal to the personal allowance of £12,570, meaning it is taxed at 0%.

When that is done, assuming there is no other taxable income, then the full £5,000 starting savings rate plus £1,000 savings allowance are available, meaning the combined taxable income can be up to £18,570 per year at 0% tax. The tax free lump sum and ISA interest will be in addition to this, and those are always non-taxable.

HMRC are not interested in how much of the tax free lump sum element of the pension is taken in each tax year. The only rule that they would require to be enforced is that the lifetime Lump Sum Allowance (LSA) is not exceeded. For most people that LSA is £268,275 (there are exceptions where some pensioners have protected limits that were registered at the time of rule changes).

HMRC expect the pension providers to enforce that limit, and for this reason, the pension provider will usually require a declaration of how much of the LSA has been used to date, as part of the request for each tax free lump sum withdrawal.

You would only need to be concerned about the LSA if your total value of all pensions is over £1,073,100 (or is likely to be with future growth).

By the way, you would not be required to submit a self-assessment simply because you have started pension draw down. The taxable element of pensions are paid using PAYE. You would only need to be in self-assessment if your tax affairs are more complex.

Gerbert

to eskbanker: "Out of curiosity, why?"

Why have I not filled in a tax self-assessment for many years, or why am I expecting to do so when I begin taking my pension?

If the former: because I have not had any taxable income for many years.

If the latter: because I was expecting that once I begin taking my pension I will have a taxable income (if only because of interest on savings - but precisely this has now been put in doubt by the current conversation).

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81947822#Comment_81947822

Most people have no reason to file a tax return and nothing you have mentioned suggests you would either.

Although if this new source of untaxed interest is £10,000 or more then HMRC would expect you to file one.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81947822#Comment_81947822

Sorry, yes, it was the latter, i.e. why are you expecting to self-assess!

Having taxable income isn't in itself the determining factor, as many millions pay income tax without self-assessing, so unless your savings income exceeds £10K/year (regardless of allowances), it's unlikely that you'd be required to self-assess, even if accessing taxable pension funds.

https://www.gov.uk/check-if-you-need-tax-return

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81947822#Comment_81947822

Go through this check list.

Check if you need to send a Self Assessment tax return - GOV.UK

I was employed until 5 years ago, and claiming higher rate tax relief on pension contributions.

I now get a monthly pension, a taxable state pension and take taxable lump sums from another pension. Plus I have some taxable savings interest.

I have not filled in a Self Assessment for about 8 years. What you should do is to register to have access to your online personal tax account.

Personal tax account: sign in or set up - GOV.UK

Gerbert

https://forums.moneysavingexpert.com/discussion/comment/81947814#Comment_81947814

If I have understood, the scenario in the first three paragraphs here would then mean that one might have 16760 + 6000 = 22760 (if one had sufficient savings and interest thereon) without being taxed at all. If I had more interest though, presumably then I would have to send in a self-assessment. Is that correct?

I don't understand the reference to PAYE in the final paragraph, but that may be because I understand PAYE as (literally) Pay As You Earn. In this scenario I would not be 'earning' anything.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81947880#Comment_81947880

Taxable pension income is just like earnings really when it come to PAYE.

You cannot generally have 16760 + 6000 though, it's 12570 + 6000 (+500 in dividends).

You are just complicating things mixing taxable and non taxable sources.

Gerbert

Thanks to eskbanker and Albemarle for the links.

Dazed_and_C0nfused, I don't understand why it's not 16760+6000. The 16760 is made up of 12570 taxable and 4190 untaxable. But if (as everyone has informed me) the untaxable part makes no difference to the starting savings rate (ie does not 'eat into it' as the taxable part does) then surely we still have another 6000 of interest on savings on top?

What am I (still) missing?