Personal Tax Calc - Example 3

This example is for a low earner who also has interest income ie gross earned income of £5,000 with gross interest income of £6,000. Please note that I have grossed up these figures (see Net to Gross).

Personal tax pyramid 4

1. Draw the salary onto the earned income pyramid. As the full income falls into the lowest layer, it is all within the personal allowance and so taxed at 0%.

2. The low earned income changes the shape of the interest income pyramid. Two lower layers are added to represent 0% starting rate and then 10% interest tax rate, these layers are specifically for those with low earned income. The specific rules are given in low earner interest income rules. In this example, as earned income is less than the personal allowance (£7,475).

The bottom layer of “ununsed” personal allowance is filled up with £2,475 (ie £7,475 - £5,000) which is taxed at 0%. The next layer is also filled up ie £2,560 of interest income which is taxed at £10%. Finally, the remaining interest of £965 (£6,000 - £2,475 - £2,560) which is taxed at 20%.

The total interest income tax is £449 (ie £2,560 * 10%) + (£965 * 20%))

Please note that typically, this income will have been taxed at 20% by the bank / building society before payment net. If that is the case, then £1,200 of tax will have been paid ie an overpayment of £751. This can be reclaimed. You can also apply to have your interest paid before tax.

The low earner interest income rules section contains an example where a pro-rata amount of the low savings level can be utilised.