Tax on savings interest

[Rufus Stone]

There has been several threads here querying if the tax free allowance can be reduced by the interest itself being added. The consensus being no it's relevant to your earned/pension income marginal rate, but recent events have lead me to question that.

This building society website says it can:

https://www.skipton.co.uk/savings/personal-savings...

"Can savings interest push me in to a higher rate income tax band?
Yes. If you enter a different rate band when you add your savings interest to your earned income, you would qualify for the lower or no PSA (depending on what band you think you currently sit in)."

Examples:

Salary £48000
Savings interest £2270
Tax due on savings interest (£2270 -£1000) x 20% = £254

Salary £48000
Savings interest £2271
Tax due on savings interest (£2270 - £500) x 20% = £354 + (£1 x 40%) = £354.40

It's a huge penalty for benefiting from an additional £1 of interest.

My personal experience for 2023-24 appears to support Skiptons advice. My salary and dividends were less than the 40% threshold but when savings interest was added I was over and my savings interest allowance was reduced to £500.

Edited by Rufus Stone on Sunday 14th July 06:30

[ucb]

Think I'd be blaming the regressive tax system the UK utilises to reduce personal success
Plenty of other tax cliff edge examples in the legislation

[Rufus Stone]

Yes I agree. Far to many examples of doing better and being disproportionately penalised.

[ferret50]

The additional savings interest tax relief that is available to non PAYE should always be used if available.

State Pension at about £884 x 13 £11492ish so currently below the basic £12570 allowance, so roughly £1k surplus, plus the £1k all but higher earners get, plus the additional £5k that is available, so it is possible for the non PAYE pensioner, or anyone else not in employment, yo have an income completely tax free of up to £18570......

If one is caught by PAYE but total income is below that £18570 then you lose the allowance £ for £, I am in this position as I receive an ex forces pension that takes my income over £12570 thus PAYE on the second pension, so I end up worse off compared to 'er indoors!

It will be interesting to see what Rachel Reeve does when SP rises above the £12570 threshold.

[Puzzles]

Yes that’s how it works.

[Sheepshanks]

Rufus Stone said:

There has been several threads here querying if the tax free allowance can be reduced by the interest itself being added. The consensus being no it's relevant to your earned/pension income marginal rate, but recent events have lead me to question that.

This building society website says it can:

https://www.skipton.co.uk/savings/personal-savings...

"Can savings interest push me in to a higher rate income tax band?
Yes. If you enter a different rate band when you add your savings interest to your earned income, you would qualify for the lower or no PSA (depending on what band you think you currently sit in)."

Examples:

Salary £48000
Savings interest £2270
Tax due on savings interest (£2270 -£1000) x 20% = £254

Salary £48000
Savings interest £2271
Tax due on savings interest (£2270 - £500) x 20% = £354 + (£1 x 40%) = £354.40

It's a huge penalty for benefiting from an additional £1 of interest.

My personal experience for 2023-24 appears to support Skiptons advice. My salary and dividends were less than the 40% threshold but when savings interest was added I was over and my savings interest allowance was reduced to £500.

It’s a bit of a shame, but £100 in £50K doesn’t seem “huge” and it could be avoided unless you’ve already maxxed out ISAs. Pay some salary into a pension, split ownership of the money (and therefore the tax liability) with your partner etc. If you really where that marginal then make a small donation to a gift aid qualifying charity - can be done retrospectively.

[Dixy]

I wonder how many over 70 year olds sat on a small private pension and a large deposit account and a few shares left to them by Aunt Mabel realise they are tax avoiders. Then again prison is cheaper than care homes.

[Rufus Stone]

Sheepshanks said:

It’s a bit of a shame, but £100 in £50K doesn’t seem “huge” and it could be avoided unless you’ve already maxxed out ISAs. Pay some salary into a pension, split ownership of the money (and therefore the tax liability) with your partner etc. If you really where that marginal then make a small donation to a gift aid qualifying charity - can be done retrospectively.

It's not the affordability that annoys me. It's the unfairness. Effectively, £1 into higher rate taxation costs £100.40 in tax.

[Sheepshanks]

Dixy said:

I wonder how many over 70 year olds sat on a small private pension and a large deposit account and a few shares left to them by Aunt Mabel realise they are tax avoiders. Then again prison is cheaper than care homes.

HMRC pulls all this information together and would adjust the tax code on their private pension.

There’s probably a bigger danger that they might be paying too much tax if interest rates drop although it should sort itself out.

[pingu393]

This is why you should keep an eye on this sort of stuff.

I'm at the lower threshold, but with lots of interest / gains from investments.

ISAs and SIPPs and PBs are my greatest helpers to avoid tax. Many thousands can be legally saved if your invested money is managed prudently.

It used to be only FAs who could do this sort of thing, but the internet has given everyone the same tools as a financial advisor, and a bit of googling can teach you a lot of the skills.

[Sheepshanks]

Rufus Stone said:

It's not the affordability that annoys me. It's the unfairness. Effectively, £1 into higher rate taxation costs £100.40 in tax.

Well, yes - arguably it’s unfair that you’re paying tax on the interest earned on money that you’ve already been taxed on. Some people will think it’s unfair that you’re so rich that you can afford to have £50K sloshing around in a savings account.

[Rufus Stone]

Sheepshanks said:

Well, yes - arguably it’s unfair that you’re paying tax on the interest earned on money that you’ve already been taxed on. Some people will think it’s unfair that you’re so rich that you can afford to have £50K sloshing around in a savings account.

[Dixy]

Sheepshanks said:

HMRC pulls all this information together and would adjust the tax code on their private pension.

There’s probably a bigger danger that they might be paying too much tax if interest rates drop although it should sort itself out.

You would think but you would be wrong.