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Paraplanning: how the starting rate for savings can help reduce your clients’ tax bills

04 November, 2020Jane Alford

The 0% starting rate of tax is a special rate of income tax on savings which benefits low-income savers, such as part-time workers or those who have retired. As a paraplanner, you should know how one of your clients – or their partner – may be able to benefit from this special rate. Jane Alford explains how.

The starting rate for savings

Calculator, stationery and orangeThe first thing is that the starting rate for savings covers interest from sources such as:

  • banks and building societies
  • open-ended investment companies (OEICS) and unit trusts that pay interest
  • government bonds
  • corporate bonds
  • payments from life annuities.

The maximum amount of savings that can qualify for the starting rate of tax is £5,000. This means that up to £5,000 of interest received from a client’s savings can be earned tax free.

However, this is restricted by any non-savings taxable income, such as a pension income or salary. None of the starting rate band will be available if taxable income is over the personal allowance of £12,500 plus £5,000, in other words a total of £17,500.

How to establish whether your client qualifies for the starting rate

A quick way of doing this is to add up your client’s non-savings income, in other words any earned income they are receiving. If this is below £17,500 in this tax year (2020/21) then the 0% starting rate will apply. If it’s over £17,500 they won’t be eligible. 

If a client is eligible for the blind person’s allowance then the amount increases to £20,000, made up of:

  • the personal allowance
  • the starting rate band, and
  • the blind person’s allowance.

Using the personal savings allowance as well as the starting rate band

Let’s put this into practice by looking at an example. 

Darcey earns a salary of £14,000 a year and receives £3,000 in interest from her savings account.

The first £12,500 of Darcey’s salary is covered by her tax-free personal allowance. The remaining £1,500 is taxed at 20%.   

That means that the amount of Darcey’s savings that can be tax free is £3,500. This is calculated as the £5,000 savings rate threshold minus the £1,500 of earned taxable income. 

This means that the interest of £3,000 she receives from her savings will be completely free of income tax. 

If we assume that Darcey had a salary of £17,000 and interest from savings of £4,000 then the calculation would look like this:

  • Salary of £17,000 minus her personal allowance of £12,500
  • £4,500 of her salary is taxed at 20%
  • There is £500 of the starting rate band left – that is, £5,000 minus her earned income of £4,500 – so this is completely tax free
  • Darcey also has a tax-free personal savings allowance of £1,000 so this can also be set against her interest
  • This leaves £2,500 of interest to be taxed at 20.

The starting rate for savings may not apply to many of your clients, but it’s important that you recognise when it does.

Jane Alford with dog
Jane Alford is the Founder of Jane Alford Associates and has been working in financial services for over 30 years. She’s worked for major life companies as a trainer and technical consultant designing and delivering face-to-face training, and has contributed content to LIBF's Diploma in Paraplanning (DipPP).

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