In 2009–10, Jim, aged 66, has an income of £11,000 made up of a state pension of £5,000 and savings income of £6,000. – Essaylink

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In 2009–10, Jim, aged 66, has an income of £11,000 made up of a state pension of £5,000 and savings income of £6,000. None of his spending qualifies for tax relief, but he gets a personal allowance of £9,490. The personal allowance is set first against his state pension (which counts as ‘other income’). The remaining £4,490 of allowance is deducted from his savings income, leaving £1,510. There is no ‘other income’ left to use up any of the starting rate band, which can be set against the £1,510 of savings income which is, therefore, taxed at 10 per cent. Jim pays total tax of 10% × £1,510 = £151.

Ling, 52, has a part-time job and earns £10,000 a year. She also has £1,000 savings income. Her personal allowance of £6,475 is completely used up against her earnings (which count as ‘other income’). So too is her starting-rate band which carries a tax rate of 20 per cent when used against ‘other income’. The remaining £1,085 of earnings and her £1,000 savings income both fall within the basic-rate band and are taxed at 20 per cent. Her total tax bill is 20% × (£2,440 + £1,085 + £1,000) = £905.

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