Quick tax query

[JonathanRyan]

(Don't worry - I leave the heavy lifting to a proper accountant but I'm running through some projections on a rainy Sunday afternoon....)

So.....

My Personal Allowance is 11,500. And Basic Rate is payable on the next 33,500.

Also, the first 1,000 of bank interest is chargeable at 0% and the rest at my "highest rate of tax".

Question: does that 1K count towards by basic rate/personal tax allowance?

I.e. if I earned £45,000 excluding bank interest of £1K then would I still only pay basic rate? Or would HMRC say I have "earned" 46K and tax me at

0% X 11.5K (PersAllow)
0% X 1K (bank interest)
20% X 32.5K
40% X 1K

 

[zendog]

They will say you earned £46k and tax you as you show.

The calculation always goes:

Gross income 46

less allowances (12.5)

Taxable Income 33.5

Tax payable

first 32.5 @20% 6.5
remainer 1 @40% 0.4
Total due 6.9

 

[JonathanRyan]

They will say you earned £46k and tax you as you show.

The calculation always goes:

Gross income 46

less allowances (12.5)

Taxable Income 33.5

Tax payable

first 32.5 @20% 6.5
remainer 1 @40% 0.4
Total due 6.9

Thanks. As I feared, all this talk of a "personal savings allowance" is fictional

Now for the advanced question.....

If I'm a "higher rate tax payer" then the PSA is £500 not £1000.

So does it go something like.....

Gross income 46

less allowances (12.5)

Taxable Income 33.5

Tax payable

first 32.5 @20% 6.5
remainder 1 @40% 0.4

Oops, you're a higher rate tax payer so allowances are actually 12, jump back 3 steps and charge you 40% on 1.5k? Tax bill becomes £7,100

And so basically I pay 60% tax on my 1K of bank interest.

 

[munch]

As I feared, all this talk of a "personal savings allowance" is fictional

Except most people (81.5%) don't pay the higher rate of tax. Nor do they get over £1000 interest in a tax year.

Also don't forget that any ISA you have is not included in the total. (interest from savings)


By the way nice way to say "look how much money I have"

 

[JonathanRyan]

Except most people (81.5%) don't pay the higher rate of tax. Nor do they get over £1000 interest in a tax year.

Also don't forget that any ISA you have is not included in the total. (interest from savings)


By the way nice way to say "look how much money I have"

Nah, it's more like "how do I get my Excel to work in case I have a really good year" It's even got a line for "additional rate" and I don't think I'll ever see a non zero there.

But I learned a while ago that an afternoon's tax planning can often pay better than most other things I can do on a wet winter's day.

As for an ISA, I'd rather put my money in premium bonds

 

[StewartR]

Now for the advanced question.....

If I'm a "higher rate tax payer" then the PSA is £500 not £1000.

So does it go something like..... Tax bill becomes £7,100

And so basically I pay 60% tax on my 1K of bank interest.

Yeah but no but.

If you're in a situation where your earned income on its own wouldn't make you a higher rate tax payer, but (in the absence of a personal savings allowance) your earned income plus savings income would make you a higher rate tax payer, then it's not particularly clear how HMRC determines which personal savings allowance applies. For example this "tax help for older people" site tries to explain it, but there's a loophole between their 3rd and 4th examples.

However I think you have done it correctly, i.e. the decision as to whether you are a higher rate tax payer for the purposes of this calculation is based on your earned income plus savings income. This HMRC leaflet explains it like that, I think. It's a 2016 publication so the figures it uses are not correct now, but I assume the method will not have changed. From page 5 of the leaflet:

An individual usually qualifies as a basic rate taxpayer for the £1,000 Personal Savings Allowance if their income, including any non-ISA savings income and dividends they receive, is below £43,000.

But anyway:
If you have £45,000 of earned income and no savings income, your tax bill is (£11,500 x 0%) + (£33,500 x 20%) = £6700.
If you have £45,000 of earned income and £1,000 of savings income, your tax bill is (£12,000 x 0%) + (33,000 x 20%) + (£1000 x 40%) = £7000.

So you've paid an extra £300 tax on that £1,000 of savings income, which is a rate of 30%. Not 60%.

Incidentally I think both your calculation in post #1 and Steve/zendog's calculation in post #2 are incorrect, because the personal savings allowance doesn't apply if you don't have any savings income. If you have £46,000 of earned income and no savings income, then your tax is (£11,500 x 0%) + (£33,500 x 20%) + (£1,000 x 40%) = £7,100.

I think. Maybe. This makes my head hurt.

 

[JonathanRyan]

Wow - thank you! Um, I think

So you've paid an extra £300 tax on that £1,000 of savings income, which is a rate of 30%. Not 60%.

Kind of. Or 60% tax on £500

I have to admit, the 52.5% tax on dividends has rather taken me by surprise.

 

[StewartR]

I have to admit, the 52.5% tax on dividends has rather taken me by surprise.

Why? What rate would you have expected?

 

[JonathanRyan]

Why? What rate would you have expected?

Well, they used to be taxed as income less tax already paid. So 0% at basic rate (to take into account the 20% already paid) and 20% at higher (which again really equates to 40). According to HMRC, 52.5% is a much "fairer" number.

Once the dividend allowance disappears (and it's already starting to taper) that's a lot of tax for some people.