There is currently no HMRC guidance available on the interaction of the personnel allowance, savings rate band (SRB), savings allowance, and different categories of income. This is a shame, as taxpayers need to appreciate how their savings will be taxed in the current tax year.
From 6th of April 2016 savings income (includes interest but not dividends) is taxed at 0% if it falls with the taxpayers saving allowance or SRB. The level of the savings allowance is determined by the taxpayers adjusted net income, not by reference to their highest marginal tax rate:
Adjusted net income is the taxpayers total taxable income before deduction of the personnel allowance, but after deduction of losses, and after the thresholds have been expanded to give higher or additional rate relief for gift aid donations and pension contributions. Thus a basic rate taxpayer may have a savings allowance of £500 rather than £1000.
Peters adjusted net income before deduction of his personal allowance is £32,050. As his basic rate band threshold is £32,000, his savings allowance is £500 rather than £1,000. Peters tax liability is £4,110, calculated as follows:
If Peter makes a gift aid donation of £40 net, (£50 Gross), either within 2016/17 or before he submits his 2016/17 tax return, as his basic rate band threshold is increased to £32,050. As his adjusted net income now lies within his basic rate band, his savings allowance is set at £1000. Peters tax liability is reduced to £4010, saving £100!