Explaining the Starting Rate Band for Savings Income
Last updated on September 25th, 2019 at 4:21 am
It looks like the 0% saving rate might be a consideration in the recent AF5 fact-find, so we thought we would just refresh our memories on what this is. In reality, advisers are unlikely to come across it that often as it will apply to very few people, but in the exam world it could easily come up in CF1, R03, R06, AF1 as well as AF5.
This article is relevant to examinable tax year 2017/18.
The starting rate is 0% and applies to the first £5,000 of taxable savings income BUT it only applies where savings income falls within the first £5,000 of taxable income, which is the amount after the personal allowance has been deducted.
Earned income (eg pension or salary) is taken into account before savings income in any income tax calculation, so if someone has earned income of more than £16,500 then the 0% savings rate is not going to be available for that person (this is £11,500 personal allowance plus the £5,000 starting rate band). The starting rate band is in addition to the personal savings allowance (PSA), so let’s look at how these interact: (remember that the PSA is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers with additional rate taxpayers not eligible).
Example of How the Personal Savings Allowance and Starting Rate Band are Applied
Let’s consider Elaine, who is aged 70 and has pension income of £11,500. She also has £700 in savings income. Elaine’s non-savings (ie pension) income is below £16,500 and the savings income is within £5,000. Her pension income is covered by her personal allowance and there’s no tax on her savings.
So what happens if her pension income is £16,000 with the same £700 of savings income? The first £11,500 is covered by her personal allowance. The balance of £4,500 is taxed at the basic rate of income tax which is 20%. Elaine’s non-savings (pension) taxable income does not exceed £5,000 but the £4,500 taxable pension income means that there is only £500 of the starting band left which is taxed (or not) at 0%. The rest of her savings of £200 is covered by her personal savings allowance (PSA).
Calculating tax liability when the 0% starting rate & personal savings allowance are in play Share on X
| £ Earned Income | £ Savings Income |
|
|---|---|---|
| Pension Income Savings Income | 16,000 | 700 |
| Personal allowance | (11,500) | |
| Amount on which tax is calculated | 4,500 | 700 |
| £4,500 x 20% | 900 | |
| £5,000 - £4,500 = £500 taxed at starting rate £700 - £500 = £200 covered by PSA | 500 x 0% 200 x 0% |
If Elaine’s total income stays within the basic rate threshold, her savings income will be covered up to £1,000 by her PSA. However, if she is pushed into higher rate tax, the PSA will reduce to £500, and the rest of her savings income, the excess of £200, will be taxed at the higher rate of 40%.
Grab the resources you need!
If you’re studying for your CII R03 exam, and you don’t want to waste precious time figuring out the calculations, you’ll need to be well prepared. Grab our free taster to try out one of Brand Financial Training’s calculation workbooks for yourself. Click the link to download the R03 calculation workbook taster now!
Alternatively, you can download taster resources for CF1, R06, AF1, or AF5 if one of those exams is causing you some concern.
