Tax on savings question

[Benjy911]

If an individual is in the 20% tax bracket through salary income, but is also getting interest from their savings, does that count as additional income or is it treated separately?

I.e they are earning £49k, and the interest on savings for the year is £10k. Is the 10k taxed at a flat 20% or does it combine with income to push them into the 40% tax bracket?

And I assume the tax will be taken out the salary with no need to do a self assessment?

TIA

Edited by Benjy911 on Monday 5th February 13:45

[Rufus Stone]

I believe part will be taxed at 0% (the savings interest allowance), part at 20% and part at 40%.

I don't believe HMRC will adjust your tax code for PAYE to collect this so a self assessment will be required.

[Eric Mc]

Benjy911 said:

If an individual is in the 20% tax bracket through salary income, but is also getting interest from their savings, does that count as additional income or is it treated separately?

I.e they are earning £49k, and the interest on savings for the year is £10k. Is the 10k taxed at a flat 20% or does it combine with income to push them into the 40% tax bracket?

And I assume the tax will be taken out the salary with no need to do a self assessment?

TIA

Edited by Benjy911 on Monday 5th February 13:45

The savings are added to your other income to come up with a new Gross Income amount.

In your example, your Gross Salary is £49,000. If you earned an additional £10,000 in bank or building society interest, your total before tax income for the year is now £59,000.

However, before you start calculating tax you deduct the various allowances you are entitled to. The main allowance is the standard Peronal Tax Allowance whih currently stands at £12,570 per annum.
If you are a Higher Rate Taxpayer, you are allowed receive £500 Bank Interest tax free (Basic Rate Taxpayers have an interest allowance of £1,000). So, in effect, your total allowances become £13,070.

The total tax liability arising in your scenario for 2023/24 comes to £10,832. You would expect that the tax on the £39,000 salary will have been calculated and deducted through PAYE from your salary. As £39,000 is not enough to put you into the 40% tax band, this tax would have been calculated at 20% i.e £7,540.00. The balance due of £3,292.00 arising from the interest income of £10,000 is, in theory, payable under the self assessment system.

You could try contacting HMRC to let them know what the situation is regarding the interest and they MIGHT be able to adjust your PAYE Tax Code to enable them to guestimate the additional tax generated by the expected interest but they will be guessing and they almost definitely won't get it completely right.

Now that interest rates are climbing again, many people will find that they will need to sign up to self assessment to enable them to pay any tax arising on this interest.

[Panamax]

Eric Mc said:

Now that interest rates are climbing again, many people will find that they will need to sign up to self assessment to enable them to pay any tax arising on this interest.

And a lot of those people will have the added bonus of being pushed up into the next tax rate band. The combined effect of surging inflation, rising interest rates and frozen tax bands is absolutely pernicious. Quite simply, it's income tax as a tax on inflation - alongside CGT which is already a tax on inflation.

Rishi and his mates think people won't notice and can fooled into thinking (a) inflation has gone away, and (b) taxes are being reduced. Just some of the reasons why Rishi and his mates will be seeking suitable alternative employment later this year.

[LeighW]

Panamax said:

And a lot of those people will have the added bonus of being pushed up into the next tax rate band. The combined effect of surging inflation, rising interest rates and frozen tax bands is absolutely pernicious. Quite simply, it's income tax as a tax on inflation - alongside CGT which is already a tax on inflation.

Rishi and his mates think people won't notice and can fooled into thinking (a) inflation has gone away, and (b) taxes are being reduced. Just some of the reasons why Rishi and his mates will be seeking suitable alternative employment later this year.

Fiscal drag. Genius really, because most people really won't notice. Going off topic, have labour said what they'll do with personal allowances when they get in? The shadow chancellor has already said that the main rate of corp tax will stay at 25%, she hasn't mentioned the 19% small profits rate, it wouldn't surprise me if they increase that. Which would be nice.

[Froomee]

Benjy911 said:

If an individual is in the 20% tax bracket through salary income, but is also getting interest from their savings, does that count as additional income or is it treated separately?

I.e they are earning £49k, and the interest on savings for the year is £10k. Is the 10k taxed at a flat 20% or does it combine with income to push them into the 40% tax bracket?

And I assume the tax will be taken out the salary with no need to do a self assessment?

TIA

Edited by Benjy911 on Monday 5th February 13:45

It’s treated as additional income and the £10k interest will push into the 40% bracket but you can negate this through ISA’s/Pension contributions.

If it’s under £10k (I think) then a self assessment isn’t required and you can notify HMRC at the beginning of the tax year of your anticipated income. If you don’t then the bank/s notify HMRC or your income from interest and they usually adjust your code mid year. If it’s too late in the year or a significant amount you can pay it off as a lump sum or your code is adjusted in the following tax year.