Long-term savings and tax

Mehitabel

I'm trying to find a wise investment for a lump sum. I won't need access to it, so tying it up for 5 years wouldn't be a problem.

I was looking at NS&I's "Guaranteed Growth Bond", but I notice they say it may not be suitable for someone who isn't a taxpayer. Being unemployed, sadly, I'm not. Please can anyone explain to me why these bonds wouldn't be suitable for someone in my situation?

I assume it's something to do with Gross/Net interest, but I'm ashamed to say I don't really understand the difference between the two..

Many thanks.

Reaper

By default savings accounts have basic rate tax deducted from any interest they pay you. Gross is the figure before this happens, Net is afterwards.

If you are a higher rate tax payer you have to pay the extra in your annual tax bill.

If you are a non-tax payer you can ask for the interest to be paid without deducting any tax. This account is unusual in not allowing you to do that, so you would do better elsewhere.

Rollinghome

But you can still claim any tax paid back from the taxman in the normal way. I assume they mean one of their other products where tax can be paid gross would be less hassle for a non-tax payer.

Jake'sGran

Rollinghome wrote: »

But you can still claim any tax paid back from the taxman in the normal way. I assume they mean one of their other products where tax can be paid gross would be less hassle for a non-tax payer.

I'm not sure this is true about NS&I accounts. Mehitabel would be better putting the money in a Building Society fixed rate bond. There are some good ones about at the moment. I prefer two years due to poor health and did one this week with Birmingham Midshires @ 4.25% or 4.17% for monthly interest.
You can make withdrawals but lose 90 days interest on the amount withdrawn.

The difference between Gross/Net is that GROSS means the full amount of interest is credited to your account (provided your income is no more than that which is allowed for your age). You must send a form R85 with your application. Nett is with the tax deducted by the Bldg Soc/Bank. They then pay it to the Inland Revenue. I am a non taxpayer and in the past ten years or more have been contacted only once by the Revenue to give more detail regarding my income.

These days I write to them only when I have been charged tax in error by some bank or BS. I just list my income including pensions and interest on accounts and then show any tax deducted in error. It is then refunded by the Revenue..

Mehitabel

Reaper wrote: »

By default savings accounts have basic rate tax deducted from any interest they pay you. Gross is the figure before this happens, Net is afterwards..

So, let me just check I've got this right: You invest with them. A sum of interest becomes due... This is the gross figure. They then tax you, and what is left is Net... Am I right? (Yes, it is possible for someone to be this dense, trust me! :cool:)

Interesting points, too, Jake's Gran. Your suggestions make a lot of sense.

Thanks to everyone trying to help a total Numpty..! :T

Reaper

Mehitabel wrote: »

So, let me just check I've got this right: You invest with them. A sum of interest becomes due... This is the gross figure. They then tax you, and what is left is Net... Am I right?

Correct.

I think RollingHome is correct in that you ought to be able to apply to have any overpaid tax repaid at the end of the year, but if you are unlucky they may ask you to do a full tax return which is a right pain. Having your interest paid Gross (i.e. no tax deducted) is a whole lot easier.

As Jake'sGran says if you open an account elsewhere be sure to tell them you are a non-tax payer and you want the interest paid tax free. You normally need to fill in an extra form.

Mehitabel

Doh....

So does all this still apply even though I'm only a non-taxpayer because I'm out of work at the moment?

:think:

Jake'sGran

I think it might still apply but you could always ring the local tax office and ask this question. When my son was out of work some years ago he had paid a lot of tax in that year. After a while the Revenue repaid the amount overpaid but I think this system has changed - not sure. I cannot see that you would need to pay interest on your bulding society interest when you are not employed. If you were to get a new job the IR would then issue a new tax code which, presumably, would take into consideration the gross interest you had received.

If you don't expect to work again invest the money and send an R85 to whoever you invest with.

Rollinghome

Mehitabel wrote: »

Doh....

So does all this still apply even though I'm only a non-taxpayer because I'm out of work at the moment?

:think:

The details of your current earnings don't really matter. All that counts are your earnings over the full tax year.

You can't sign an R85 form for NS&I savings as you can for banks. The reason being that unlike banks they can offer specific product that are paid gross. But yes, if you pay more tax than you should, including on NS&I savings that are paid with tax deducted, then you can claim it back in the normal way. Similarly, if you should have paid at the higher rate rather than just the 20% deducted then you have to pay the taxman the extra bit.

The NS&I bit you want is here http://www.nsandi.com/products/ggb/howitworks.jsp#whatabouttax

If you think you'll be below the annual tax threshholds you can sign an R85 to get paid interest from a bank paid untaxed/gross. R85 helpsheet here: http://www.hmrc.gov.uk/helpsheets/r85-helpsheet.pdf The form to claim back overpaid tax on savings is the R40 which is a sort of shortened tax return: http://www.hmrc.gov.uk/forms/r40.pdf