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    • Sueluce
    • By Sueluce 16th Apr 19, 5:53 PM
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    Sueluce
    Tax on Savings
    • #1
    • 16th Apr 19, 5:53 PM
    Tax on Savings 16th Apr 19 at 5:53 PM
    Could anyone help me with a tax problem? I am a low earner having recently retired. My total income (pension) is just lower than my personal allowance of 12500, but I do have savings. HMRC have just told me that because I do not pay tax, I do not qualify for my personal savings allowance and therefore I would have to pay tax on all my savings interest - presumably if my annual interest was £1000, I would have to pay tax of £200. Is this correct? Doesn't seem right. Thanks in advance
Page 1
    • eskbanker
    • By eskbanker 16th Apr 19, 6:13 PM
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    eskbanker
    • #2
    • 16th Apr 19, 6:13 PM
    • #2
    • 16th Apr 19, 6:13 PM
    Sounds like a misunderstanding - depending on exactly how much savings interest income you're anticipating it's possibly true that the personal savings allowance as such doesn't apply but that you still wouldn't pay tax on the savings if you're able to take advantage of the starting savings rate of up to £5,000 at 0%.

    This is explained in more detail at https://www.moneysavingexpert.com/savings/tax-free-savings/, but feel free to post more details about your income from all sources and someone can confirm the tax implications....
    • ColdIron
    • By ColdIron 16th Apr 19, 6:29 PM
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    ColdIron
    • #3
    • 16th Apr 19, 6:29 PM
    • #3
    • 16th Apr 19, 6:29 PM
    While you may not qualify for the Personal Savings Allowance it would appear that you are eligible for the Starting Rate for Savings, a £5,000 band above the Personal Allowance for savings interest taxed at 0%

    https://www.gov.uk/apply-tax-free-interest-on-savings
    https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me

    NB The HMRC link has not been updated to reflect the £12,500 Personal Allowance 2019/2020
    • Dazed and confused
    • By Dazed and confused 16th Apr 19, 6:58 PM
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    Dazed and confused
    • #4
    • 16th Apr 19, 6:58 PM
    • #4
    • 16th Apr 19, 6:58 PM
    As others have said you probably cannot make use of the Personal Savings Allowance (actually a 0% tax rate) but you can use the savings starter rate where upto £5,000 of taxable interest is taxed at 0%.

    How much interest do you expect to receive in 2019:20?

    What prompted HMRC to tell you this, seemingly incorrect, information?
    • Sueluce
    • By Sueluce 16th Apr 19, 7:08 PM
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    Sueluce
    • #5
    • 16th Apr 19, 7:08 PM
    • #5
    • 16th Apr 19, 7:08 PM
    As others have said you probably cannot make use of the Personal Savings Allowance (actually a 0% tax rate) but you can use the savings starter rate where upto £5,000 of taxable interest is taxed at 0%.

    How much interest do you expect to receive in 2019:20?

    What prompted HMRC to tell you this, seemingly incorrect, information?
    Originally posted by Dazed and confused
    Expected interest for 19/20 is no more than £1,000. I rang HMRC, because they have reduced my personal allowance by £168, because of estimated untaxed interest on savings for this tax year (19/20). They told me nothing of the Savings Starter Rate and have insisted that my tax code should be reduced because of my expected interest earnings of £168.
    • Sueluce
    • By Sueluce 16th Apr 19, 7:18 PM
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    Sueluce
    • #6
    • 16th Apr 19, 7:18 PM
    • #6
    • 16th Apr 19, 7:18 PM
    Sounds like a misunderstanding - depending on exactly how much savings interest income you're anticipating it's possibly true that the personal savings allowance as such doesn't apply but that you still wouldn't pay tax on the savings if you're able to take advantage of the starting savings rate of up to £5,000 at 0%.

    This is explained in more detail at but feel free to post more details about your income from all sources and someone can confirm the tax implications....
    Originally posted by eskbanker
    Expected interest for this tax year is no more than £1,000. How would I "take advantage of" the Starting Savings Rate? Income from pensions will be just under my personal allowance of £12,500.
    • Dazed and confused
    • By Dazed and confused 16th Apr 19, 8:30 PM
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    Dazed and confused
    • #7
    • 16th Apr 19, 8:30 PM
    • #7
    • 16th Apr 19, 8:30 PM
    I'm going to hazard a guess that your estimated pension income in 2019:20 is £12,332.

    And your new tax code for 2019:20 is 1233L.

    Which would mean you would pay no tax on your pension.

    Can you confirm your expected pension and tax code for 2019:20?

    There is nothing you need to do to take advantage of the savings starter rate of tax, HMRC will take in into account when reviewing your tax position. For example in 2019:20 your overall tax liability might be as follows,

    Pension £12,332
    Interest £1,000
    Total income £13,332
    Less Personal Allowance £12,500
    Income to be taxed £832
    £832 x 0% (savings starter rate) = £0.00
    • LobsterMemory
    • By LobsterMemory 16th Apr 19, 8:43 PM
    • 121 Posts
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    LobsterMemory
    • #8
    • 16th Apr 19, 8:43 PM
    • #8
    • 16th Apr 19, 8:43 PM
    So, in other words,

    1 Yes, you will have to pay tax on all your savings
    2 For the first £5000, the tax rate is 0% so you pay no tax on your savings
    • Sueluce
    • By Sueluce 16th Apr 19, 9:26 PM
    • 6 Posts
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    Sueluce
    • #9
    • 16th Apr 19, 9:26 PM
    • #9
    • 16th Apr 19, 9:26 PM
    I'm going to hazard a guess that your estimated pension income in 2019:20 is £12,332.

    And your new tax code for 2019:20 is 1233L.

    Which would mean you would pay no tax on your pension.

    Can you confirm your expected pension and tax code for 2019:20?

    There is nothing you need to do to take advantage of the savings starter rate of tax, HMRC will take in into account when reviewing your tax position. For example in 2019:20 your overall tax liability might be as follows,

    Pension £12,332A
    Interest £1,000
    Total income £13,332
    Less Personal Allowance £12,500
    Income to be taxed £832
    £832 x 0% (savings starter rate) = £0.00
    Originally posted by Dazed and confused
    Estimated Pension income £12,500 (annuity and drawdown).
    Estimated Savings Interest £1,000.
    Tax Code is 1219L. HMRC have put a deduction on because of the estimated interest they think I will earn based on last year (which is much lower than the current year). In the 45+ minutes I was talking to them, not once did they mention the Savings Starter Rate. I just don't know who I can talk to about it.
    • Dazed and confused
    • By Dazed and confused 16th Apr 19, 9:36 PM
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    Dazed and confused
    Estimated Pension income £12,500 (annuity and drawdown).
    If you have two pensions you should have two tax codes but you only mention one, 1219L.

    How is the £12,500 (pension income) split between the annuity and drawdown?

    Have you looked at your personal tax account to see how much HMRC have estimated each pension to be in this tax year?

    Part of the problem is that they may have got this wrong (drawdown is tricky to estimate as you could change the amount every month if you wanted!).

    Based on what you have posted so far the savings starter rate of tax will mean you owe no tax on your interest.

    You should be aware that each £1 your pension income (or wages if you got a part time job) which exceeds £12,500 reduces the £5,000 savings starter rate band by £1 but this is unlikely to be a problem for you, particularly as if you lost the ability to use it (for example if your pension income was £17,500) you would still have the savings nil rate of tax where upto £1,000 of interest is taxed at 0%.
    • Sueluce
    • By Sueluce 16th Apr 19, 9:49 PM
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    Sueluce
    Only a monthly amount coming in at the moment, which won't change totalling £8.5k. The drawdown hasn't been setup yet, but when it is, won't be any more than £4k (for this tax year). So only one code of 1219L.

    Do not intend to have any other income.

    So why are the HMRC reducing my tax code? I don't understand it.
    • Dazed and confused
    • By Dazed and confused 16th Apr 19, 9:55 PM
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    Dazed and confused
    Because they don't have a crystal ball and will not make adjustments or issue tax codes in respect of income which doesn't yet exist.

    The current facts are you have one pension of £8,500. And a tax code of 1219L means no tax will be deducted from it.

    So any savings interest upto £4,000 will be covered by your spare Personal Allowance hence the reduction to your tax code.

    Currently neither the savings target rate or savings nil rate are of any use to you.

    When your circumstances actually change you should get two tax codes.

    850L for the annuity.
    400T for the drawdown pension.

    As you will then have no spare Personal Allowance the interest (assuming it is no more than £6,000) will all fall to be taxed but at a 0% rate.
    • Sueluce
    • By Sueluce 16th Apr 19, 10:06 PM
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    Sueluce
    I understand that the tax code will be split, as you say (850 & 400) and they don't have a crystal ball, but I can't get my head around why the tax code should be reduced because of an estimated £168 of earned savings interest, especially as you say it should be taxed at 0%. Surely by reducing the code it's going to incur tax at a lower rate of earnings.


    Perhaps I will just have to wait and see what happens. I just don't want to pay any tax as my income is so small, so trying to sort it before they deduct it from me.

    Thank for your help.
    • Mr.Saver
    • By Mr.Saver 16th Apr 19, 10:33 PM
    • 292 Posts
    • 145 Thanks
    Mr.Saver
    I understand that the tax code will be split, as you say (850 & 400) and they don't have a crystal ball, but I can't get my head around why the tax code should be reduced because of an estimated £168 of earned savings interest, especially as you say it should be taxed at 0%. Surely by reducing the code it's going to incur tax at a lower rate of earnings.


    Perhaps I will just have to wait and see what happens. I just don't want to pay any tax as my income is so small, so trying to sort it before they deduct it from me.

    Thank for your help.
    Originally posted by Sueluce
    At the moment, before the drawdown starts, you are earning less that your (reduced) personal allowance right now, so you won't pay any tax on it.

    The tax code change is to collect the correct amount of tax if your income raises dramatically (e.g.: 20k annually) in the middle of this tax year.

    If you don't want to pay any taxes (and get a refund later) when you start the drawdown, you will need to tell HMRC when is the drawdown starting, and the expected amount from the drawdown. So HMRC can review your tax code, and avoid collecting taxes from you if they don't need to.
    • pattieshoe
    • By pattieshoe 18th Apr 19, 11:08 AM
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    pattieshoe
    Don't understand the tax position on savings
    I deferred state pension for a few years and then took the lump sum to carry out repairs to my house. I was told I did not have to pay tax on this as my income would be below the £11,500 allowance for that year 17/18
    I have since received a letter from HMRC asking me for £2486.41 tax from 2017/18 made up as follows:-
    17/18 Income £11,418
    bank interest £368
    making a total of £11786 which exceeds my allowance so I am due to pay the tax on the lump sum for going over by £286.
    I thought my bank interest should not be counted as Martin always says you can earn £1000 interest without being taxed. HMRC don't agree. I can now see why people keep their savings under the mattress and not in the bank!
    • eskbanker
    • By eskbanker 18th Apr 19, 11:35 AM
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    eskbanker
    I deferred state pension for a few years and then took the lump sum to carry out repairs to my house. I was told I did not have to pay tax on this as my income would be below the £11,500 allowance for that year 17/18
    I have since received a letter from HMRC asking me for £2486.41 tax from 2017/18 made up as follows:-
    17/18 Income £11,418
    bank interest £368
    making a total of £11786 which exceeds my allowance so I am due to pay the tax on the lump sum for going over by £286.
    I thought my bank interest should not be counted as Martin always says you can earn £1000 interest without being taxed. HMRC don't agree. I can now see why people keep their savings under the mattress and not in the bank!
    Originally posted by pattieshoe
    This probably ought to be in a separate thread as your query is specifically about taxation of a lump sum, but it sounds like you were misinformed - lump sums from deferring SP are taxable, as per https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/626494/state-pension-deferral-if-you-reached-state-pension-age-before-6-april-2016-extra-information.pdf:
    How much will I get if I defer my State Pension?

    If you reached State Pension age before 6 April 2016 you may choose one of these two options:
    • Extra State Pension - taking a higher weekly State Pension for life if you defer for at least five weeks. For each full year you put off claiming, you could get a 10.4% increase of your State Pension, or
    • Lump-sum payment - taking a one-off, taxable lump-sum payment if you put off claiming your State Pension for at least 12 months without a break, and then getting your normal weekly State Pension for life. This means that you will get a one-off payment based on the amount of State Pension you would have got if you had been claiming it, as well as interest on this amount. (The interest will always be at least 2% above the Bank of England ‘base rate’.) You will also get your State Pension at the normal rate when you claim it.
    Your post is confusing though, as HMRC won't ask for £2486.41 tax if your total income (including the lump sum) was £11,786 - is the lump sum definitely included in that £11,418 non-savings income?

    Edit: I misunderstood the point being made, but this scenario is the same one as the worked example for Graeme in the document posted by xylophone below, and essentially boils down to the difference between 'tax-free income' and 'income taxable at 0%'. As sub-£1K savings interest falls into the latter category, the amount is enough to mean that your highest tax rate is regarded as being the 20% basic rate and the consequence of this is that the lump sum is therefore taxable at that rate. This must be one of the more extreme examples though, where £286 of income gives rise to an additional tax liability of £2486, effectively a marginal tax rate of 869%!
    Last edited by eskbanker; 18-04-2019 at 12:19 PM.
    • xylophone
    • By xylophone 18th Apr 19, 11:40 AM
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    xylophone
    See https://www.litrg.org.uk/tax-guides/pensioners/what-tax-do-i-pay-my-state-pension-lump-sum
    • Dazed and confused
    • By Dazed and confused 18th Apr 19, 8:12 PM
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    Dazed and confused
    I thought my bank interest should not be counted as Martin always says you can earn £1000 interest without being taxed. HMRC don't agree
    You have misunderstood a few things. Firstly you are not able to make use of the £1,000 savings nil rate of tax (aka Personal Savings Allowance).

    Your income is too low. Your savings interest is taxable income and £286 of it is being taxed. It is not "tax-free". You are being taxed at the savings starter rate of tax. Which is 0%.

    This is a perfect example of how misleading references to tax free are. A very expensive lesson.
    • pattieshoe
    • By pattieshoe 19th Apr 19, 4:38 PM
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    pattieshoe
    not understanding tax on savings
    Many thanks for your replies, I should have gone onto another thread, first time of posting on anything, ever, sorry.
    I should have explained that when I first received the 12k lump sum from HMRC they had already taken the £2486 tax from it. OK with me I expected it. Months later they refunded this tax to me saying I didn't need to pay it as a I was a low earner - I didn't realise this was possible. Months later again they asked for it back because the bank told them I had received interest income of £368 making me a tax payer.. This is when I became very confused that for going over by such a small amount I paid such a large amount of tax. Had I known I would, of course, ensured I didn't earn that interest, hence keeping my money under the bed comments. Still no way round it. Thanks again.
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