Savings tax and basic/higher/additional tax

[ILikeCake]

Thinking of whether to stick rainy day/emergency funds in Premium Bonds or a savings account (no ISA allowance left).

According to the .gov website, a basic rate tax payer gets £1000 allowance for savings interest, higher rate get £500, and additional rate get £0.

What I can't confirm is whether contributing to your pension can shift you into a lower band. E.g.

Person A earns £50,270 and is a basic rate taxpayer. They earn £1000 in savings interest; no tax is due as they are within the allowance.

Person B earns £50,271 and is a higher rate taxpayer. They earn £1000 in savings interest; their allowance is £500 so they will be taxed at 40% on the £500 above the allowance (40% of £500 = £200 in tax). So they are left with £800.

Is my understanding correct? If so, putting aside how mad this policy is (earning £1 could cost someone £200!?), could person B contribute £1 to their pension? I.e. putting them in the "lower" band and gaining a larger allowance?

[NerveAgent]

I guess the missing bit here is that the savings interest is treated as income.

So 49271 + 1000 would reduce your allowance to £500. But it would mostly be taxed at 20% in this scenario.

Yes it’s based off adjusted net income. So pension contributions can take you back under the threshold.

[OllyAitch]

If Person B put that extra £1 into their pension, it would bring them back into basic rate territory, so they’d get the full £1,000 savings allowance instead of £500.
It’s one of those quirky tax cliff edges where a tiny change can make a big difference.