OK. So at the risk of of going round in circles on this, and for my future understanding, can I just get this straight.
Up to £100,000 all my income is through the PAYE system and taxed correctly.
However, if you earn over £100,000 the system can't allow for the fact you then lose £1 of tax free allowance (£12570 in this case) every £2 of income over £100,000.
So, setting aside the interest earned on savings, if income was £100,144; all of which has been taxed via the PAYE system, the £144 would incur a loss of £72 of tax free income which then taxed at 40% would be £28.80. Which is an effective rate of 20% on the £144.
Now bring in the £128 of interest earned on savings, theoretically tax free but not really, and that then reduces tax free allowance by a further £64. Surely this would then mean a further £25.60 in tax owed. Which when added to the previous £28.80 actually means £54.40....
Is all of this correct or have I misunderstood something?
Thanks for the replies.
So as I said in my final sentence. I am effectively taxed on ANY interest made on savings as, in my case, it reduces my tax free allowance.
The numbers still don't quite add up though but at least it is a little closer.
During the 2022/23 tax year my earnings just stepped over £100,000 by £144. As per guidance I submitted a tax return. All of my pay is through the PAYE system. I was expecting a tax bill of around £29 as my understanding is that I lose £1 of my tax free allowance for every £2 earned over £100k. However, the tax bill is £58 which is a straight 40% of £144.
I called HMRC and they said that because I earned £128 interest on savings my tax relief is reduced by this amount also and so consequently the £144 is taxed at 40%. Is this correct as I thought I could earn up to £500 tax free interest on savings. Incidentally, the numbers still don't quite add up based on this.
If what I was told is correct then is it true that in this situation effectively ANY interest on savings is taxed as it still reduces your tax free allowance?
I completed a self assessment tax return for 2022/23 for the first time and I entered interest on savings which was below my PSA. Should I have done this as it seems I have been taxed on that interest.