ISAs, savings, business accounts, tax, thresholds... 18, naive, dislikes jargon. Help

tomclowes

Hello everyone,

Im not sure how y'all learnt, but I am 18, and investment savvy.. I love investment, and I want to get into business.

Tax, ISAs, types of bank accounts etc all go over my head. I have been reading all of martins guides to get a basic idea but I am not sure exactly where to go. Any advice would be great.

Basically i want to open a business, simply so I can be a business. I am registering it with the companies house, and intend to get an Abbey Business bank account.
A business bank account is a requirement for setting up a business paypal account, which is all I want really. I do not intend to put any money in it.

At the moment I have a Barclays current account which my parents set up when I was younger. I probably have about £1,000 in there from my job.
Since I have had that account, I have earned a pathetic amount of interest (pence), and never been taxed. I am assuming a)because I was under 18, b) because i didnt have 6 grand... c)None of it was income.

This is where all this savings stuff comes in.

I earn under the income tax threshold (<£6000), I get taxed automatically by my employers, but intend to claim in all back at the end of my contract.
My money goes directly into my current account. I can spend it as I choose, withdraw it etc, no cost.

What I want to do is spend a portion of my monthly income on shares, spend a portion of it on premium bonds, and maybe a few other investments. I assumed that with shares I just bought them through a website, easy as, no tax, nothing. Apparently not.
On the share front the Halifax sharebuilder looks like exactly what I want. £1.50 to buy, £5 to sell (<£250).. £6.50 in all transaction costs (I bleieve??), and I am assuming if shares do go up, they will at least cover that cost..? (I know the risks of investment, dont worry).

Next is saving. I usually have some funds in a bank account, and I may as well be earning from it if I do. If I am going to save, am I correct in thinking I should open an ISA?
I have looked at the article on the best ISAs, and understand how they work. My question is: The £3600 yearly limit.. once the interest has been added to it, say you have £3650, does the £50 interest count as part of your next years allowance?
Shares, and ISAs.. If i use Halifax sharebuilder, do I need to do anything strange to associate my shares with my ISA so as not to have to pay tax on them?


If I have an ISA and am putting my average allowance limit of £300 in a month... If I earn £600 a month, and want £300 to go into my ISA, and £300 to go into a savings account to which I have easy access: for my day to day spending, do I simply have it transfered by BACS into my savings account, and then withdraw £300 and go and deposit it in my ISA account?

If my employer is taxing me before I get my money, I end up having to claim tax back.. so for example instead of £600 I actually get £50. Would that simply be a case of putting £300 in ISA, £250 IN Accesible savings, and claiming the tax back at a later stage?

If I earn below the tax threshold anyway, what is the point of an ISA?
Finally If I earn £9600 a year, assuming £6000 is the tax threshold, assuming I am putting £300 monthly directly into my ISA which is tax free, and the remainder goes into another bank account, or savings accounts. Do i pay 0 tax that, as £3600 is going into a tax free account, and the remainder is below thje threshold. If not, how does it work?


Sorry for my jumbled ramblings, and for my naivity. I would love to be enlightened.
Tom

Lokolo

Investment savvy you say? :rolleyes:

Why would you want an ISA if you aren't a tax payer? Well because the chances are you aren't going to stay a non taxpayer your whole life, so when you do become one, you still don't have to pay tax on the interest. Whereas if you just put it in a savings account, as soon as you start paying tax you have to pay tax on the interest.

Interest does not count towards allowance. (which is extremely good when getting large amounts of interest from ISAs as technically you can eventually have 2 per year, 1 from new money, 1 from interest)

I have earned a pathetic amount of interest (pence), and never been taxed. I am assuming a)because I was under 18, b) because i didnt have 6 grand... c)None of it was income.

Interest is income. The banks automatically put tax free interest for under 18s as the chances are under 18s do not pay tax. Has nothing to do with the amount in the bank.

If you start paying tax you must tell your bank.

What I want to do is spend a portion of my monthly income on shares, spend a portion of it on premium bonds, and maybe a few other investments.

PBs are one of the worst choices to make for an investment, the return is extremely low. Buying individual shares is a very expensive option. And "other investments"..... well I am not sure what this is.

Shares, and ISAs.. If i use Halifax sharebuilder, do I need to do anything strange to associate my shares with my ISA so as not to have to pay tax on them?

Shares have their own ISA part if you want. You can put upto £7200 in Stocks and Shares ISA (minus any money in Cash ISA though)

If I have an ISA and am putting my average allowance limit of £300 in a month... If I earn £600 a month, and want £300 to go into my ISA, and £300 to go into a savings account to which I have easy access: for my day to day spending, do I simply have it transfered by BACS into my savings account, and then withdraw £300 and go and deposit it in my ISA account?

If my employer is taxing me before I get my money, I end up having to claim tax back.. so for example instead of £600 I actually get £50. Would that simply be a case of putting £300 in ISA, £250 IN Accesible savings, and claiming the tax back at a later stage?

No idea what you are on about here.

You have your money paid into current account, so every month you have X amount into Barclays Current Account. You can then BACS it elsewhere, so you can put Y in ISA and Z in Savings, either through BACS or debit card payment or cheque or go into branch or whatever.

Finally If I earn £9600 a year, assuming £6000 is the tax threshold, assuming I am putting £300 monthly directly into my ISA which is tax free, and the remainder goes into another bank account, or savings accounts. Do i pay 0 tax that, as £3600 is going into a tax free account, and the remainder is below thje threshold. If not, how does it work?

Its the interest which is tax free, not the income that you get from job.

tomclowes

Cheers for the response.
I wrote that incorrectly, I am not investment savvy, rather interested in investment.

So am I correct in thinking that if in some wierd situation I got paid £7000 a year in one lump some at the end of the year, £1000 of which I have had tax taken off by my employer, then my bank would take off tax on the interest of that extra £1,000 too? If however I put the extra £1,000 in an ISA I would not have to pay tax on the interest? And finally so ISAs are only to do with interest?

Regarding PBs, have not really properly looked into them but if I used the £1000 above to invest in premium bonds, I would not have to pay tax on the interest on the remaining £6,000 in my bank?

Regarding shares im not sure exaclt what you mean.. I would be spending maybe £100 on shares in a particular company each month to gradually build up a portfolio..
Regarding the shares ISA, my question was I use halifax sharebuilder, and my ISA account is with Company B. Firstly what interest is there on shares for which I want to avoid tax? and how do I associate my shares with my ISA?

So regarding tax am I correct in thinking either your employer takes tax off before hand, and if not you fill in various forms and send it off yourself.
ISAs/savings simply deal with interest, and tax on interest: ISAs have no tax on interest up to £3600 cash. Correct?

Thanks again.

Lokolo

Ok I will explain the tax system hopefully.

You earn £7000 a year from your job. You have £x in savings. You get £40 interest. The savings is not an ISA.

Over the year you get taxed 20% for everything over £6000 in your income. You you pay tax on £1000 from your income. 20% of this is £200. This means over the year your income will be £6800.

You get £40 interest from savings. You pay 20% of this meaning you pay £8 tax from this. You overall get £32 interest.

£x in savings account doesn't matter.

masonic

tomclowes wrote: »

So am I correct in thinking that if in some wierd situation I got paid £7000 a year in one lump some at the end of the year, £1000 of which I have had tax taken off by my employer, then my bank would take off tax on the interest of that extra £1,000 too? If however I put the extra £1,000 in an ISA I would not have to pay tax on the interest? And finally so ISAs are only to do with interest?

Normally, as your earnings would be below your tax-free allowance, you could register any bank account to receive interest tax-free (contact them for an R85 form), so you do not pay tax on any interest in your savings accounts. If your income then went over your personal tax-free allowance, you would need to pay tax on all of your bank interest (except, as you say, if it was in an ISA).

Regarding PBs, have not really properly looked into them but if I used the £1000 above to invest in premium bonds, I would not have to pay tax on the interest on the remaining £6,000 in my bank?

No, the premium bond prizes are paid tax-free, but if you've earned enough to pay income tax, then buying premium bonds will not change the fact you've used up your tax-free allowance in income, and it won't protect your bank interest from tax.

Regarding shares im not sure exaclt what you mean.. I would be spending maybe £100 on shares in a particular company each month to gradually build up a portfolio..
Regarding the shares ISA, my question was I use halifax sharebuilder, and my ISA account is with Company B. Firstly what interest is there on shares for which I want to avoid tax? and how do I associate my shares with my ISA?

Halifax would have to allow you to buy your shares within a stocks and shares ISA. I don't know whether or not they do that.

So regarding tax am I correct in thinking either your employer takes tax off before hand, and if not you fill in various forms and send it off yourself.
ISAs/savings simply deal with interest, and tax on interest: ISAs have no tax on interest up to £3600 cash. Correct?

You can put up to £3600 per year in an ISA and interest paid on the whole balance is tax free.

jem16

tomclowes wrote: »

Since I have had that account, I have earned a pathetic amount of interest (pence), and never been taxed. I am assuming a)because I was under 18, b) because i didnt have 6 grand... c)None of it was income.

How do you know you haven't been taxed on the interest? Banks automatically take off 20% for tax unless you have filled in an R85 form.

I earn under the income tax threshold (<£6000), I get taxed automatically by my employers, but intend to claim in all back at the end of my contract.

If you earn under £503 per month you should not be taxed at all. What is your tax code? If it's not 603L you need to get that sorted.

If my employer is taxing me before I get my money, I end up having to claim tax back.. so for example instead of £600 I actually get £50.

Hopefully you are not paying £550 out of £600 in tax. :eek:

cheerfulcat

tomclowes wrote: »

Basically i want to open a business, simply so I can be a business. I am registering it with the companies house, and intend to get an Abbey Business bank account.
A business bank account is a requirement for setting up a business paypal account, which is all I want really. I do not intend to put any money in it.

What sort of a business are you thinking of setting up? You do realise that you'll need to fill in a tax return for this?

What I want to do is spend a portion of my monthly income on shares, spend a portion of it on premium bonds, and maybe a few other investments. I assumed that with shares I just bought them through a website, easy as, no tax, nothing. Apparently not.

No - you need to set up an account with a broker to buy shares. There is tax to pay on purchase ( stamp duty ) and there is capital gains tax on any net profit over £9600 ( this year's allowance ).

Shares, and ISAs.. If i use Halifax sharebuilder, do I need to do anything strange to associate my shares with my ISA so as not to have to pay tax on them?

You'd need to use their regular self-select ISA rather than the Sharebuilder account.

If I earn below the tax threshold anyway, what is the point of an ISA?

It allows you to shelter money from the taxman against a time when you are a taxpayer.

Masomnia

tomclowes wrote: »

Regarding the shares ISA, my question was I use halifax sharebuilder, and my ISA account is with Company B. Firstly what interest is there on shares for which I want to avoid tax? and how do I associate my shares with my ISA?

There are two distinct types of ISA; Cash ISAs, which you have with company B by the sounds of it; and Stocks and Shares ISAs, which you need to open separately with Halifax, assuming that's who you choose.

You don't recieve interest for shares. You (usually) get paid dividends, which is the share of a company's profit to which you are entitled as a share holder, and you also earn money (hopefully!) in the form of capital gain through the shares increasing in value. On both of which you may be liable to pay tax.

However, check very carefully whether a stocks and shares ISA is for you, they often have extra charges associated with them. The Sharebuilder account isn't an ISA account by the way. Since you won't pay income tax, you will not pay tax on dividends recieved (and you won't as a basic rate tax payer either), and you will not need to worry about Capital Gains Tax as this only applies to sales making a profit of over £9,000 (or thereabouts). So there is little advantage to you having a Stocks and Shares ISA right now anyway.

If I were you I'd do more reading and research on this before you start committing money. Then decide what account is right for you.

tomclowes

Wow, Thanks everyone for the help!

Lokolo: That makes sense.

Masonic: Again, that seems to make sense. So basically banks assume you are in the 20% bracket unless otherwise informed? Also am I reading correcly, if you go over the no-tax threshold, you have to pay tax on ALL the interest, rather than the excess?

The PB question, so essentially when you earn money before you do anything with it you pay income tax on the excess, then in any savings account etc EXCEPT for an ISA you also pay tax on the interest as and when it comes?


jem12: I probably have been being taxed on the interest, although until now interest has never really concerned me as it has been pence.

Tax code: Not sure. All I now is money goes into my current account each month, and it already has had tax paid. As I am not going to earn over the limit, I am told I simply claim the tax back as/when I can be bothered.. although not too sure how

And no, typo

cheerfulcat: Well at this moment in time, none really, BUT I have a paypal premier account for online transactions, and want to upgrade that to a business. I have a variety of websites which I am hoping to turn into businesses hence why. A business bank account is simply a requirement of this.. I was considering dropping my current account with barclays, getting an abbey business account, and simply using it as a personal account really, or not at all. Just to tick paypals boxes.
My intention is that if I do get into these web business properly, then I can use this one overall business bank account for them....

If i go with the Halifax regular self-select ISA, I am exempt from tax on £7,200 of shares. I will be buying the shares with money from my bank account, which will have already been taxed, thus assuming I have less than £7,200 of shares then no tax on dividends etc
If I use this, have £7,200 of stock, and then my shares rocket so I now have £50,000 value of shares, there is no tax on that correct as it was earned from an amount within my quota?

Masomnia: If i get the Halifax ISA above, and one elsewhere for cash... am I correct in thinking the limits are over your ISA accounts, so I cant have £3,600 cash and £3,600 stock in one, and then £7,200 stock in another..?

If I earn £5,500 in a year, which I therefore pay no tax on, then invest in stock: the value rises to £50k (I wish). In that year I have earned £5.5k... but really I have earned £55.5k, so am I liable to pay tax (20/40% respectivly) on the £49k?

And yes, I definately will continue to research. I feel very stupid atm.

Lokolo

Masonic: Again, that seems to make sense. So basically banks assume you are in the 20% bracket unless otherwise informed? Also am I reading correcly, if you go over the no-tax threshold, you have to pay tax on ALL the interest, rather than the excess?

Yes, it gets a bit more complicated if you have lots of interest but hardly any income, but we sharn't worry about that for now.

The PB question, so essentially when you earn money before you do anything with it you pay income tax on the excess, then in any savings account etc EXCEPT for an ISA you also pay tax on the interest as and when it comes?

Yes exactly!

Tax code: Not sure. All I now is money goes into my current account each month, and it already has had tax paid. As I am not going to earn over the limit, I am told I simply claim the tax back as/when I can be bothered.. although not too sure how

Do you get payslips? It will be on them. It will be 3 numbers then letters, so something like 603L or BR.

If i go with the Halifax regular self-select ISA, I am exempt from tax on £7,200 of shares. I will be buying the shares with money from my bank account, which will have already been taxed, thus assuming I have less than £7,200 of shares then no tax on dividends etc
If I use this, have £7,200 of stock, and then my shares rocket so I now have £50,000 value of shares, there is no tax on that correct as it was earned from an amount within my quota?

Masomnia: If i get the Halifax ISA above, and one elsewhere for cash... am I correct in thinking the limits are over your ISA accounts, so I cant have £3,600 cash and £3,600 stock in one, and then £7,200 stock in another..?

No that is the amount you can deposit into shares to get tax free status.

If you buy £7,200 of stock and it raises to £50,000 and you then sell them, you pay tax called Capital Gains. If the shares were bought in an ISA you won't have to pay this tax.

Second bold bit. That is correct, only 1 tax year. You can have £3600 cash, then £7200 - any cash in Stocks and Shares. Then after April 6th you can do it again. So example:

April 6th 2008 - April 5th 2009: You deposit £3600 into Cash ISA. You put £2000 in Stocks and Shares ISA.
April 6th 2009 - April 5th 2010: You deposit £3600 into Cash ISA. You put another £3000 in Stocks and Shares ISA.

masonic

tomclowes wrote: »

Masonic: Again, that seems to make sense. So basically banks assume you are in the 20% bracket unless otherwise informed? Also am I reading correcly, if you go over the no-tax threshold, you have to pay tax on ALL the interest, rather than the excess?

That's essentially correct. If you go over the threshold (or expect to do so) then you are not supposed to receive bank interest free of tax and need to let your bank(s) know so that they can start collecting tax on all of your interest. However, if you have a tax free allowance of £6035 and earned, say, £6000 through employment and £200 in bank interest, you would be able to claim some of the tax back (you'd only be liable for tax on the excess interest). Essentially, you are not supposed to get into the position where you have received interest tax free and then owe tax on some of it.

If I earn £5,500 in a year, which I therefore pay no tax on, then invest in stock: the value rises to £50k (I wish). In that year I have earned £5.5k... but really I have earned £55.5k, so am I liable to pay tax (20/40% respectivly) on the £49k?

In this situation only the £5,500 counts as income. If you sold all the shares at £50,000, then you would have made a capital gain of £44,500. Capital gains are treated separately from income, and have a separate allowance and tax rates (see this page), You would therefore be liable for capital gains tax on some of that sum (you'd pay 18% on any gains over £9600) if it were held outside of a stocks & shares ISA, but you wouldn't pay any income tax as a result of selling the shares.