Chargeable event gains for bonds and starting rate for saving: Q&A

4 min read 28 Feb 22

By The Technical Team

Starting rate for savings

Q: What is the £5,000 0% starting rate

A: It is a tax band which applies to savings income that falls within certain limits. The starting rate for savings changed with effect from 6 April 2015 - the band increased to £5,000 and the rate reduced from 10% to 0%.

Availability

Q: Does my client qualify for it?

A: If any of your taxable savings income falls within the first £5,000 of the basic rate band, you will not be liable to pay any tax on that taxable savings income, as the starting rate for savings income is 0%.

Q: What’s the limit?

A: The starting rate for savings band is £5,000 for 2022/23. The 0% rate applies to as much of the first £5,000 of taxed income (after deducting the personal allowance and blind person’s allowance, if eligible) that is savings income. Dividend income is taxed after savings income and therefore, dividend income will not affect eligibility for the starting rate for savings.

Q: What are the income limits to be entitled to the starting rate?

A: If you have taxable earned and other non-savings, non-dividend income of between £12,570 and £17,570, the savings rate will apply to at least part of your savings income.

Relevance to chargeable event gain on a bond

Q: How can this help my client who has a chargeable event gain on a bond?

A: Chargeable gains on bonds are categorised as 'savings' in the tax calculations, so if a client qualifies for the starting rate for savings, they could potentially make a chargeable gain on an offshore bond to the tune of £17,570 (depending on their total taxable income) without having to pay any tax on the gain at all. This increases by £1,000 to £18,570 once the Personal Savings ‘Allowance’ (PSA) is factored in.

Offshore bond

Q: How does it work with an offshore bond?

A: Let’s look at an example:

An individual earning £5,000 can make a chargeable gain on an offshore bond of £12,570 in 2022/23 without having to pay tax:

Tax Year 2022/23

	Earned Income	£5,000
	Chargeable gain (offshore)	£12,570
	Total income	£17,570
				Tax Due
Deduct	Personal Allowance		(-£12.570)	Nil
	Remaining Income	£5,000
Deduct	Savings rate @ 0%		(-£5,000)	Nil
	Remaining income	£0
	Basic rate @ 20%			Nil
			Total tax due	Nil

This principle applies to clients who have no or minimal earnings, such as those who only have state pension or are in full time education. University students (those over the age of 18) with no earnings whatsoever, can make a chargeable gain of £17,570 on an offshore bond without incurring any tax.

Note also that if the PSA is included, that figure is actually £18,570. From 6 April 2016, the £1,000 PSA was introduced. If however any of the individual’s income is higher rate income, then the allowance will be reduced to £500. If any of the income is additional rate income, then the allowance will be nil. The PSA is more accurately described as a savings nil rate, since the amount of savings income covered by the PSA will still form part of the individual’s total income.

Related insights

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.