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Tax on savings interest

Practical Issues
MyNameIsUrl
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Tax on savings interest

#520172

Postby MyNameIsUrl » August 5th, 2022, 6:09 pm

A retired person is receiving state pension and withdrawing just enough from a sipp to keep under the 12570 tax allowance. Can they earn up to 5000 in savings interest tax free?

This person has very recently had an inheritance which will be in a savings account for the remainder of the tax year. The interest will be added to the account on 31 December. Will the interest amount reported to HMRC be the amount paid in December for the period August to 31 December, or the total accrued from August to next 5 April?

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Re: Tax on savings interest

#520426

Postby Myfyr » August 7th, 2022, 1:25 am

The former, ie 31 December.

monabri
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Re: Tax on savings interest

#520440

Postby monabri » August 7th, 2022, 8:39 am

https://www.moneysavingexpert.com/savin ... e-savings/

"if you earn less than £18,570 a year in income and savings interest combined, you won't have to pay any tax on the interest paid on the savings. This £18,570 figure is made up of three separate allowances:

Your personal allowance. This is the amount you can earn without paying any income tax – for most people this allowance is £12,570 (for 2022/23).

The £5,000 starting savings rate. Here the tax rate is 0%, so again this is the amount you can earn in savings interest before paying any tax on that.

Your personal savings allowance. This is worth up to £1,000."


https://www.gov.uk/apply-tax-free-interest-on-savings

" The tax year runs from 6 April to 5 April the following year."

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Re: Tax on savings interest

#521956

Postby RajK » August 12th, 2022, 5:22 pm

Sorry to barge in on the thread am i clear in saying that when you consider your eleigibility for this extra £5000 tax free from interest income you take £18750 and only subtract earned income from the likes of pension or employed/self employed work? You do not include the interest from savings or dividends from shares? So for example if someone is earning 14500 from income and 7000 from savings interest and 1850 from dividends -

They would subtract 14500 from 18750 which is 4250. They could earn up to £4250 in saving interest tax free? Their dividends of £1850 would fall into dividend allowance and not be taxed and also not affect the calculation for the tax free saving interest?

Thankyou

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Re: Tax on savings interest

#522056

Postby Gersemi » August 13th, 2022, 9:52 am

RajK wrote:Sorry to barge in on the thread am i clear in saying that when you consider your eleigibility for this extra £5000 tax free from interest income you take £18750 and only subtract earned income from the likes of pension or employed/self employed work? You do not include the interest from savings or dividends from shares? So for example if someone is earning 14500 from income and 7000 from savings interest and 1850 from dividends -

They would subtract 14500 from 18750 which is 4250. They could earn up to £4250 in saving interest tax free? Their dividends of £1850 would fall into dividend allowance and not be taxed and also not affect the calculation for the tax free saving interest?

Thankyou


I suggest you look at https://www.gov.uk/apply-tax-free-interest-on-savings

Following the example there you subtract the Personal Allowance of £12570 from the earnings of £14500 leaving £1930 (which is taxable at the basic rate). You then subtract this from the Savings Alowance of £5000, leaving an allowance of £3070 which can be set against interest. This leaves interest of £4250 - £3070 = £1180. The £1000 Personal Savings Allowance is available to set against this, which means interest of £180 is taxable at the basic rate. So a total of £1930 + £180 is taxable at the basic rate.

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Re: Tax on savings interest

#522070

Postby mc2fool » August 13th, 2022, 11:05 am

RajK wrote:Sorry to barge in on the thread am i clear in saying that when you consider your eleigibility for this extra £5000 tax free from interest income you take £18750 and only subtract earned income from the likes of pension or employed/self employed work? You do not include the interest from savings or dividends from shares? So for example if someone is earning 14500 from income and 7000 from savings interest and 1850 from dividends -

They would subtract 14500 from 18750 which is 4250. They could earn up to £4250 in saving interest tax free? Their dividends of £1850 would fall into dividend allowance and not be taxed and also not affect the calculation for the tax free saving interest?

Thankyou

Well you could do it that way, although as Gersemi points out, it's actually calculated the other way round, from the bottom up rather than from the top down, so to speak.

It is correct that, whichever way up you do it, you only subtract earned income from the likes of pension or employed/self employed work and do not include the interest from savings or dividends from shares (irrespective of if they're within the dividend allowance or not).

Your figure of £18750 is incorrect, it's £18570 and if you figure it your way you'll see you get to the same result as Gersemi: £18570 - £14500 = £4070 of interest tax free, of which £1000 is under the Personal Savings Allowance and £3070 is under the Starting Rate for Savings.

So, to take your example of someone earning £14500 from income, £7000 from savings interest and £1850 from dividends, they'd be paying tax at the basic rate on £1930 of the income and (£7000-£4070) = £2930 of the savings interest. The dividends are less than the £2000 dividend allowance so are tax free (technically taxed at 0%).

There's an often overlooked little twist in this, in that as every extra £1 earned reduces the Starting Rate for Savings Allowance by £1 then in the situation above each additional £1 earned would, in effect, be taxed at 40% (until the Starting Rate for Savings Allowance is used up).

So if they earned £14501 from income and £7000 from savings interest, they'd be taxed at the basic rate on £1931 of the income and £2931 of the interest. I.e. 20% on the extra £1 of income and 20% on the extra £1 of interest that is no longer covered by the reduced Starting Rate for Savings Allowance because of the extra £1 of income.


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