Personal Savings Allowance - inside or outside of income?

[tdk]

Having read around a bit & done the "ask the accountant", I am still a little unclear how the Personal Savings allowance is going to be applied..

In terms of whether you are a basic or higher rate payer, the advice I've been given is that, it is their belief, as soon as you go £1 into the higher rate bracket, your PSA drops form £1000 to £500, fair enough?

With regards to how the PSA is worked out with respect to income, if taking salary + dividends up to the higher rate threshold you can additionally earn £1,000 (if BR payer) in bank interest which will no longer be taxed at source, then anything over taxed as "income" through your SA? If it is treated as more income does that therefore reduce you PSA to £500 if you earned £1,001 of bank interest on top of your BR maxed salary + divis, thus paying the higher rate on £501?

Having written it down, it all seems somewhat logical, but thought I'd ask!

[jamesbrown]

The order is: salary + interest + dividends (as the top slice), so you sum up the total (gross), and anything above the higher rate limit will mean that your PSA is £500, not £1000. In other words, the interest earned counts towards your total income w/r to the tax brackets and, yes, it's a threshold, so £1 above the threshold is sufficient to drop your PSA. Bottom line, you cannot take divis up to the higher rate threshold and earn bank interest above that while still enjoying the £1000 PSA. Your total income needs to be below the higher rate threshold, which includes any interest earned.

Another cliff-face in the tax code.

[tdk]

The order is: salary + interest + dividends (as the top slice), so you sum up the total (gross), and anything above the higher rate limit will mean that your PSA is £500, not £1000. In other words, the interest earned counts towards your total income w/r to the tax brackets and, yes, it's a threshold, so £1 above the threshold is sufficient to drop your PSA. Bottom line, you cannot take divis up to the higher rate threshold and earn bank interest above that while still enjoying the £1000 PSA. Your total income needs to be below the higher rate threshold, which includes any interest earned.

Another cliff-face in the tax code.

Firstly, thanks for the reply! This seems to be slightly different from the the advice I was given, with respect to interest being included in the calculation for whether you are basic rate or higher rate payer, so do you have any links to help me understand the calculations as you describe?

[jamesbrown]

Firstly, thanks for the reply! This seems to be slightly different from the the advice I was given, with respect to interest being included in the calculation for whether you are basic rate or higher rate payer, so do you have any links to help me understand the calculations as you describe?

It's described here.

The determination of whether you exceed the higher rate threshold is based on adjusted net income, which includes interest. In other words, if you earn £1,001 in interest and this places you £1 above the higher rate threshold (based on adjusted net income), you have a PSA of £500.

[tdk]

It's described here.

The determination of whether you exceed the higher rate threshold is based on adjusted net income, which includes interest. In other words, if you earn £1,001 in interest and this places you £1 above the higher rate threshold (based on adjusted net income), you have a PSA of £500.

Thanks I have been through that & understand it now, I was hoping not to have to worry about the amount of interest I was earning when deciding the level of dividends to pay - especially towards the end of the tax year, but I guess now it is even more important to be aware!