Tax confusion

polymaff · 14 February 2019 at 4:18PM

If you only draw your personal allowance in pension payments then you've got the first £6,000 of taxable savings interest taxed at 0%

Incidentally, "taxed at 0%", not tax-free.

davidwatts · 14 February 2019 at 4:25PM

Thanks, that was my understanding but wanted a better informed second opinion!

As this will be the first taxable amount taken from my pension I'm anticipating paying emergency tax and then having to claim it back. Hopefully that won't be too painful a process.

polymaff · 14 February 2019 at 4:40PM

Be aware that £5,000 of that 0%-taxed savings income is shoved up to being basic rate-taxed, pound for pound, if your pension/taxable benefits/earnings rises above the PA - an effective tax rate of 40%. I know someone who got caught out like this.

So, effectively paying higher-rate tax on less than £20k taxable income.

One of Mr. Osborne's clever ideas.

Dazed_and_confused · 14 February 2019 at 4:47PM

As this will be the first taxable amount taken from my pension I'm anticipating paying emergency tax and then having to claim it back. Hopefully that won't be too painful a process.

Any tax deducted will depend on how you choose to take the pension income, if it is £988/month (or less) then the emergency tax code would mean no tax was deducted.

You don't have to claim it back, HMRC will automatically refunded any excess tax deducted after the end of the relevant tax year.

davidwatts · 14 February 2019 at 4:51PM

Thanks, had to read that a couple of times but think I get it. So, if I earned £1k over my tax allowance (e.g. pension income) I'd pay 20% tax on that and £1k of my savings would become taxable as well (assuming I was using the full £6k allowance)?

davidwatts · 14 February 2019 at 4:54PM

Dazed_and_confused wrote: »

Any tax deducted will depend on how you choose to take the pension income, if it is £988/month (or less) then the emergency tax code would mean no tax was deducted.

You don't have to claim it back, HMRC will automatically refunded any excess tax deducted after the end of the relevant tax year.

What if I take it more or less now, as a single lump sum, it being my first and only taxable income this year?

polymaff · 14 February 2019 at 4:55PM

davidwatts wrote: »

Thanks, had to read that a couple of times but think I get it. So, if I earned £1k over my tax allowance (e.g. pension income) I'd pay 20% tax on that and £1k of my savings would become taxable as well (assuming I was using the full £6k allowance)?

If it'd help to see this in a more graphical manner, have a look at this:

https://forums.moneysavingexpert.com/showpost.php?p=75460038&postcount=8

Dazed_and_confused · 14 February 2019 at 5:00PM

The first payment is usually the prompt for HMRC to issue an accurate, usually cumulative, tax code so subsequent payments would be taxed accurately based on the amount and point in the tax year the payment is taken.

You should get a tax code notice when HMRC have done this.

davidwatts · 4 March 2019 at 3:09PM

polymaff wrote: »

If you only draw your personal allowance in pension payments then you've got the first £6,000 of taxable savings interest taxed at 0%

Incidentally, "taxed at 0%", not tax-free.

Just revisiting this as I'm looking at fixed term savings account rates now. Would appreciate confirmation or correction on the following points if possible.

If taxable savings interest exceeds £6k then I'd need to reduce the amount drawn from my pension by the corresponding amount to avoid paying tax, e.g. if it was £6,500 and I drew no more than £12,000 (in 19/20 tax year) then the interest would still be taxed at 0%.

For fixed term savings longer than 12 months, if the interest is added on maturity then all of it will be classed as income in that year.

Less obviously, this will also be the case if the interest is credited to the account annually but only becomes available to me on maturity, i.e. I have no access to any of the money until the end of the term.

The above being of relevance to the optimum way of receiving the interest and the amount that can be drawn from the pension before being liable for income tax.

polymaff · 4 March 2019 at 4:30PM

davidwatts wrote: »

If taxable savings interest exceeds £6k then I'd need to reduce the amount drawn from my pension by the corresponding amount to avoid paying tax, e.g. if it was £6,500 and I drew no more than £12,000 (in 19/20 tax year) then the interest would still be taxed at 0%.

No. Forget how much interest you receive. Imagine your income is a column where the lower part of the column is your taxable non-savings (e.g. wages, benefits, pensions) and the next part is your taxable savings.

Now draw a line across the column at a height of however much of your personal allowance you wish to allocate to taxable non-savings plus £5,000.

The Starting Rate for Savings you can receive is the bit of column, if any, between the top of your taxable non-savings and that line.

If you've taxable savings above the line then your particular Personal Savings Allowance and some of your remaining personal allowance can be applied.

Tax confusion

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