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  • Tax

    Income Tax on Interest

    I'm reading bits of guidance regarding income tax, but I'm not quite sure how they work together.

    • Income Tax Allowance, £12.5k, can be split between employers (incomes?) by contacting HMRC
    • Starting Rate for Savings extends the ITA to 17.5k if no other taxable income.
    • Interest Income up to 10k pa does not require a Self Assessment.

    If I were to have an employment income of £8,5k and interest income of £9k, how is the tax dealt with? Is the interest taxed at source or is it exempt? If the employment income is split between a part time job and a small director's salary does this effect the tax treatment?

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    A good teacher must know the rules; a good pupil, the exceptions.

    Martin H. Fischer

    For different employers (or pensions) HMRC will give appropriate tax codes to you/employer, if requested, so deductions should be about right.  I've get 4 tax coding notices each year (4 pensions..): And, if you have other income (property, savings, shares...) the tax codes get adjusted to account for what will be owed from other sources than employment.

    Bleedin' income tax, brought in to fight the French...

    https://en.wikipedia.org/wiki/Income_tax#United_Kingdom

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    The tax allowance for 2018/19 is £11850.

    As long as your other taxable income excluding interest is less than £11850 you will get £5000 of SRfS. For each £1 you earn over £11850, your SRfS will reduce by £1. So if you earn £15850 you will get £1000 of SRfS. It is not only earned income that affects SRfS - any income (including rent) other than interest over £11850 will reduce your SRfS.

    You will also get a Personal Savings Allowance of £1000 if you are a basic rate tax payer, £500 if you are a higher rate tax payer and £0 if you are an additional rate tax payer.

    If you only earn £8500 and £9000 of interest then you will have £17500 of income. You tax free amount will be £11850 + £5000 + £1000 = £17850 so no tax due. Splitting the income between jobs will not affect this.

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    any income (including rent) other than interest over £11850 will reduce your SRfS

    I may be mistaken but I understand that to be any taxable income. Income which is tax exempt (rent a room, trading allowance, property allowance, etc) does not appear to be included. I'm not sure how the personal savings allowance fits into this though, do you believe it is also exempt and in addition to the SRfS? I am aware that dividend income reduces the SRfS, even the £2k tax free allowance.

    I am using the 2019/20 figures, hence £12.5k.

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    A good teacher must know the rules; a good pupil, the exceptions.

    Martin H. Fischer


    https://www.gov.uk/hmrc-internal-manuals...l/saim1112 just says:

    Where an individual’s non-savings income is less than the starting rate for savings limit, the savings income will be taxable at the 0% starting rate for savings up to the limit. From 6 April 2015 the starting rate for savings limit is the individual’s personal allowances plus the starting rate band of £5,000.

    As far as I can find, only your personal tax allowance (possibly adjusted by blind person's allowance or marriage allowance - https://www.gov.uk/income-tax-rates) is taken into account before calculating SRfS. Rent-A-Room, trading allowance or property allowance are separate allowances and not an adjustment to your personal tax allowance.

    https://www.gov.uk/apply-tax-free-interest-on-savings says you can have both PSA and SRfS. PSA is applied after SRfS.

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