Tax planning with interest income
The taxation of interest income is getting very complicated with both a Savings Starting Rate Band (“SSRB”) and a Personal Savings Allowance but this complication also bring opportunities. So how is interest taxed at the moment?
Savings band
The 0% savings band for 2017/18 is £5,000. It is restricted by non-savings taxable income (say earnings or pension) so that none of the band will be available if non-savings income is above the personal allowance plus the £5,000 starting rate. So if your salary exceeds £16,500 you cannot benefit from the SSRB.
Personal Savings Allowance
On 6 April 2016, the Personal Savings Allowance was introduced at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible.
The two allowances work together and are dependent on your total taxable income.
Interest Paid Gross
Remember from 6 April 2016, savings income will be paid gross (without tax being taken).
How does the calculation work?
The easiest way to establish if you qualify is to add up your non-savings and savings income. if it is below or within your personal allowance plus £5,000, £16,500 2017/18 then the Starting Rate for Savings will apply.
If this doesn’t cover all of your savings income then you can apply the Personal Savings Allowance. To determine which rate to use add up all of your taxable income including savings income. If it’s £45,000 or less then use £1,000, if between £45,001 and £150,000, use £500. If higher it doesn’t apply.
Some examples
Example 1
Mark is 71 and has pensions income of £11,000. In addition he receives £600 in savings income. His savings and non-savings income is below £16,500 and the savings income is within the 0% savings rate of £5000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 2
If Tessa’s salary (non savings income) is £16,100 and she has savings of £600. The salary is just below the £16,500 threshold and therefore £400 of her savings income is covered by the 0% savings rate (£16,500-16,100). The remaining £200 is covered by the Personal Savings Allowance. She doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 3
If Mark’s non-savings income is between £16,501 and £45,000, he will not be eligible for the 0% Starting Rate but his savings income of £600 will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 4
If Ann’s non-savings income (salary) is between £45,001 and £150,000, she will not be eligible for the 0% Starting Rate and only £500 of her savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and she will need to contact HMRC to arrange payment.
What is the tax planning point?
If you can set your own salary and potentially take income as both dividends and interest then you can receive a substantial part of your income tax-free.
If you need help with your tax planning then please call or email us – we’re here to help!