Relationship between pension income, savings interest and capital gain

MarkAdams

Hi All,

I am trying to discover the impact of a significant capital gain on my pension income and savings interest taxation for planning purposes.

I have a personal pension (so I can vary income drawn) and cash in the bank earning £5,500 pa.

Historically I have kept my pension income at my personal allowance of £12,570 and this has meant that I have paid zero tax because all of the savings interest falls within the Personal Savings Allowance and the Starter Rate for Savings (£1000 + £5000 respectively). Income has then been supplemented (tax free) from my ISA as and when required.

I have made an unplanned and unexpected capital gain of over £200,000 in the 2026-27 tax year (not from a property sale). Which is lovely, but I am trying to understand the implications on my finances.

I have not drawn any pension income so far this tax year.

Cash in the bank is earning over £5,500 pa.

Question 1 - How does my pension income affect the capital gains tax that I will have to pay? Specifically, if I leave my pension income at £0 does that mean I pay less CGT or does it make no difference and I can take £12,570 of pension income tax free and will pay exactly the same CGT? Different calculators have given different answers to this question and various AI tools have flatly contradicted one another.

Question 2 - How does the large capital gain affect the PSA and SRS? Specifically if I leave my pension income at or below the PA do I still retain both (and so can benefit from that income tax free), one or none?

In my befuddled state (I'm not an accountant) I would try to get a definitive answer by part-filling in my tax return but unfortunately online self-assessment seems to be down on the gov. website so no joy there.

For clarity I also make a pension contribution of £2880 pa (which is grossed up to £3,600). I don't know if that makes any difference to the end result. And I'm in England.

If anyone is able to show how to calculate the CGT and income tax liability using the figures above that would be really useful. There aren't any complications going on that I haven't indicated.

Here's hoping you can shed a little light.

Thanks

Marcon

This looks as if it should hit the nail on the head - and has the merit of being both clear and brief/from a reliable source: https://www.which.co.uk/news/article/will-my-capital-gains-increase-the-tax-on-my-savings-a437T2X4MGky

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6669205/relationship-between-pension-income-savings-interest-and-capital-gain

I think your concern should be the other way round, what impact will your income have on your CGT liability.

In the situation you describe you will have used £5,500 of your basic rate band.

I have a personal pension (so I can vary income drawn) and cash in the bank earning £5,500 pa

Historically I have kept my pension income at my personal allowance of £12,570 and this has meant that I have paid zero tax because all of the savings interest falls within the Personal Savings Allowance and the Starter Rate for Savings (£1000 + £5000 respectively). Income has then been supplemented (tax free) from my ISA as and when required

DRS1

Would I be right to think the OP could safely draw enough from his pension to top the £5500 up to £12570 and not impact the CGT charged on the gain?

He would presumably not want to go above £12570 because income covered by the PSA and the Starter rate for savings income is still taxable income which would bump up the capital gain subject to 24% tax.

Would the pension contributions extend the basic rate band for CGT purposes? Or would they count as an income tax relief and come off the taxable income so he could add £3600 to the £12570?

dean350

Your taxable gain for the year is 200,000 minus your CGT allowance which is 3000. That gives a taxable gain of 197,000. You then do a separate calculation to establish at which rate that taxable gain is taxed. To do that calculation you add taxable gain to taxable income. If you are only drawing 12570 pension income each year then your taxable income is zero. You will therefore pay 18% on the first 37,700 of the taxable gain and 24% on the rest. Your interest tax still remains dependent upon taxable income - not taxable income plus taxable gain.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/82008402#Comment_82008402

But the op has already said they are receiving £5,500 in interest (no mention of it being from an ISA).

So, with £12,570 pension, they are already using £5,500 of their basic rate band

MarkAdams

Hi and thank you to everyone who posted a reply to my query.

I've since been able to log onto hmrc self-assessment and have put a few trial numbers in an actual tax return to see how the final calculation works.

As a couple of replies mentioned the capital gain has no direct impact on the Starter Rate for Saving and the Personal Savings Allowance, they both stay at £5,000 and £1,000 provided my pension income is at or below the Personal Allowance. However, making use of the SRS and PSA pushes up to £6,000 (in my case £5,500) of the taxable gain out of the basic rate band (18%) and into the higher (24%) band. On the face of it this seems like something to avoid, but it's only a 6% tax increase on £6,000 in order to keep all of the savings interest at 0% (rather than 20%/ →22% next year).

And because of the different treatment of capital -v- income the personal allowance does not apply to the gain. So if I keep my pension income at only £4,500 and the savings interest at £5,500, giving me an income below the PA, the capital gain stacks on top of the PA and no part of it fills the gap between £10k income and the PA. Which I was surprised by.

Looking at the various scenarios that I ran in the real SA tax calc the most efficient thing for my circumstances is to take my pension income up to the PA, keep my savings interest high but not over the £6,000 (SRS and PSA) and accept that this will push some of the capital gain from basic rate to higher rate CG tax. Overall this gives me more £ for the tax hit.

Along the way I discovered why I could not successfully access the hmrc self assessment web portal - I was using microsoft Edge as my browser. Even after I cleared the cache and all add-ons it still wouldn't allow log on. Google Chrome got me in first time.

Posting this stuff in the hope that it might assist other forumites. This forum is an absolute godsend of nuggets.

katejo

https://forums.moneysavingexpert.com/discussion/comment/82020140#Comment_82020140

Just a question about your problems with accessing HMRC self assessment. Was that via Government Gateway? I can't get into mine at the moment. I get part way and then get told that there are additional security questions but that there are technical problems and I must try again another day. I was using Edge too. Might it work with Chrome?

MarkAdams

Hi Katejo, Yes it was through the Gov Gateway. And yes that was the message I was getting too.

I would expect that Chrome will get you in. Good luck.

LHW99

Let's hope Firefox will also be allowed "through the Gate(way)" - I will need to get logged in for SA soon.