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

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81947912#Comment_81947912

IMHO you are just making things more complicated than they need to be.

Including non taxable income is just a bit odd (again IMHO)

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81947912#Comment_81947912

It's all down to presentation and simplicity really.

For everything to do with income tax, income from ISAs and pension tax-free sums is ignored, so naturally it makes sense to only consider taxable income when looking at thresholds, allowances, rates, codes, tax returns, etc, etc - including non-taxable income in the equation just complicates matters for many (most?) of us, and it would appear that failing to really get to grips with that key distinction is what led to your initial confusion…

Gerbert

What is wrong with my reasoning here?

People here have assured me that non-taxable income (including pension) does not affect the starting savings rate allowance. Under UFPLS, 12570 is taxable pension but falls entirely within the personal allowance, while 4190 is untaxable pension and hence does not affect the starting savings rate.

Hence the 6000 (= starting savings rate allowance (5000) + personal savings allowance(1000)) is still available for untaxed interest on savings.

So like this one can have an income of 12570+4190+6000 = 22760 without any tax being due.

cc123mm456

I think maybe I've confused the issue by referring to that £16,760 withdrawal method.

That is a figure used by people that are stretching out a small pension to approximately use it up by the date that they receive other income. That could be state pension or a DB pension coming in to payment at a later date.

For those people this is the most tax efficient approach, while keeping the majority of the pension invested as long as possible.

You do not have to take the 25% tax free lump sum evenly split across years. You could take it all at once, or in a few big payments.

The important point is that, if you have exactly £12,570 of taxable income (other than interest), then you are allowed all of the £5,000 starting savings rate, plus the £1,000 savings allowance, meaning overall £6,000 interest at 0% tax.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81947950#Comment_81947950

But what about ISA interest, premium bond wins and that £100 DWP send you for your heating bills? Where do you draw the line with non taxable income?

MV33

Good question. The 25% tax-free portion of your pension drawdown does not count as income for the starting savings rate allowance. Only the 75% taxable part affects it. It's treated similarly to an ISA withdrawal in that regard.

Gerbert

cc123mm456: sorry, I'm still not clear - do you agree with my conclusion that in the scenario I described one can have 22760 = 12570 + 4190 + 6000 with no tax due?

Dazed_and_C0nfused: where do I draw the line? ;-> I am simply trying to understand how much interest on savings one can have without being taxed on it when one has other non-taxable income in excess of 12570. This non-taxable income could (I suppose) have many sources, but I am particularly interested in case where it is the non-taxable portion of one's pension. According to what I have understood people to be saying, the answer to the question is always 6000, even if one's non-taxable income in excess of 12570 is substantial. I have been told I am overcomplicating things, but I admit do not understand why or how.

Notepad_Phil

Yes you could have 22,760 = (12570 taxable income) + (4190 as tax free lump sum) + (6000 interest) with no tax due.

You could also have 122,760 = (12570 taxable income) + (104,190 as tax free lump sum) + (6000 interest) with no tax due.

As long as the taxable income does not exceed 12570 then you can currently always receive at least 6000 of interest without there being any tax due. If you have less than 12570 then you can have pound for pound extra savings interest. If you have more than 12570 then you start to lose how much savings interest you can have.

cc123mm456

Let's try to look at it another way.

It used to be the case many years ago (before the pension flexibility rule changes) that at the point of retirement the retiring employee would have to make a once in a lifetime decision. Either take the tax free lump sum at that time, or decline it, and receive a higher pension, which would be all taxable.

The flexible pension rule changes now allow people that are above the pension withdrawal age to decide on how and when they take that tax free lump sum from a DC pension. One option is that it can be split over many withdrawals, as with the UFPLS method.

The option to take it all at the start of the retirement is still there, although this is not necessarily the most tax efficient way to take it. Because then it would then have to be saved or invested in taxable accounts.

So yes, some people can receive a one-off income in the year of their retirement, that might be hundreds of thousands and pay no tax on that. Others might decide it's better for them to split it in to multiple withdrawals across the years.

HMRC are not interested in when you take the tax free lump sum, provided you have reached the pension withdrawal age, and that the check against the lifetime pension lump sum allowance is done.

It is your entitlement to take that tax free lump sum from a pension that has been built up over your employment lifetime, and the flexible pension rules give you multiple options on how to withdraw it.

You can completely exclude it from all tax calculations.

sheramber

put another way

You can have 12570 of Taxable income

Plus

£6000 interest

Plus

As much NON taxable income as you have access to

all with no tax due

Non taxable income does not count for tax purposes.