Tax on Interest and Personal Allowance: I am confused!

[EggInANest]

Following lockdown redundancy I have effectively been shunted into retirement, and had no income for the last couple of years, living off redundancy and money that I had saved to prepare for retirement at the end of this year.

I now have an inheritance of £200k that I intend to put into a property better suited to retirement / older age in a couple of years. I will max out cash ISAs (not S&S, I will use the money in a shorter term, and can't risk losing value) , but expect to gain interest over what I believe is the amount allowed tax free.

If I am not using any of my Personal Allowance, can any additional income from interest be set against Personal Allowance? Or is income from interest a discrete amount, completely separate from other income? iyswim?

Thank you!

You have your personal allowance of £12,570 to use first, then personal savings allowance and dividend allowances on top of that.

Are you in receipt of a pension or any other income? It may be that you will receive the £5k starting rate for savings.

https://www.moneyhelper.org.uk/en/savings/types-of-savings/tax-on-savings-and-investments
https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-rates-apply-me#toc-how-does-the-starting-rate-for-savings-work-

I will have state pension from October. So 6m of state pension this financial year.

I could choose whether to top this up from draw down DC pension (have not started drawing this yet) or live off the inheritance money for the time being and then use the equivalent amount from my pension when I decide to buy the right place to live.

(my private pension is modest!)

So, if I get state pension for 6 months this tax year, and top it up from savings (not draw down pension), I will not use my personal allowance. Suppose I then make £4k in interest. £1k of that interest is tax free under the amount allowed for savings interest. Is the rest taxed, or not taxed because it is within the personal allowance?

I think if your income for the tax year is under the personal tax allowance, you can use the rest of the allowance up with savings interest and also add on the starting rate for savings of £5k.
If your income goes over your personal tax allowance, basic rate tax payers are allowed an extra £1k in savings interest but it can be more depending how much over you are, as an adjustment is made: https://www.gov.uk/apply-tax-free-interest-on-savings

If your income from savings plus your income from other sources doesn't exceed the personal allowance then there won't be any tax to pay. The new allowance only applies if you have already used up the personal tax free allowance around £12k AFAIK

In your example here, the savings interest is not taxed as it can be allocated to use up your remaining personal allowance plus you could also get the appropriate proportion of your starting rate for savings (max £5k on top of the personal allowance) depending how high your total income is in that particular tax year.

Thank you!