Reduce taxable income

newfoundglory

I don't earn anywhere near the higher rate of tax - but this has been an unusual year with olympics, overtime, some shift work and small bonus.

If I continued to work until the end of the tax year and earned nothing more than my basic salary, back of paper calc reveals taxable income of around 40 to 41 thousand.

I have quite a bit of annual leave, more than I can practically use, and have the opportunity to sell some - but have to do this before December.

I have over 120k in savings which isn't in a cash isa, earning about 3% before tax.

With 6 months to go before April, I am wondering what might be the best action to take?

If i shifted cash savings to annual rather than monthly interest accounts now, so that it is paid out 12 months from now - does this mean it won't count as income for this tax year? Is there anything else I can do?

Linton

Put more money into your pension - it comes off your gross income before tax is calculated. You do have a pension dont you?

newfoundglory

its a civil service "Nuvos" pension - a 'career average' scheme - would it be worth it?

xylophone

http://resources.civilservice.gov.uk/wp-content/uploads/2011/09/AddedpensionJan2011_tcm6-1887.pdf

jimmo

I can see your point on switching your savings to annual, rather than monthly, interest and, yes, that would work for you.

Selling your annual leave now will generate taxable earnings now so probably not a good idea this year.

getmore4less

Take the holiday or carry it over if you can

Why worry you only pay 10% more on the excess anyway is it worth the hastle.

£42475 before you hit 40% tax but NI drops by 10%

Why on earth have you not been using your ISA allowance?

grey_gym_sock

annual interest is a good idea, but check when the annual interest will be paid. for some accounts, it's the anniversary of when the account was opened; but for others, it's a fixed date, so it's no good if it's (e.g.) 31 march.

i'm not clear whether you haven't used your ISA allowance at all, or have £120k in savings in addition to your cash ISAs. if you've haven't used the allowance, start by shifting £5640 into a cash ISA.

if you will still be paying a little 40% tax this year, 1 thing to consider is making (higher) pension contributions this year, which will attract tax relief at 40%. that's if contributions are limited to the amount that would otherwise be taxed at 40%; if you contribute "too much", the excess will only get relief at 20%.

chrismac1

For most people it's not a great idea to have everything in cash earning diddly squat. The UK stockmarket produces 90% or so of its annual return in the six months from 1 November and 30 April, a fact I act on every year and have no cause to regret this.

So a cheap stocks and shares ISA or SIPP should probably be at least part of your investment mix, though this depends on your exact circumstances.

ISA - totally outwith the UK tax system from point of investment, no tax return implications. Can withdraw at will.

SIPP - suppose you put in £800. The provider claims £200 from the Government, and invests £1,000 less charges. You can include £1,000 on your tax return which moves ths starting point for higher rate tax from 42,475 to 43,475. But you must wait to retire before cashing in, and it is then taxable income in your hands.

In general, I advise using both approaches. The ISA is cashable so can help in rainy day situations. The pension gets a near 25% uplift on day 1, which is an investment return any fund manager would kill for.

newfoundglory

Sorry I was not clear on cash ISA front - i'm already maxed out on that - i always use the cash component in full - more than 50k - so that obviously saves quite a bit !!

Unusually, I have actually used part of a ftse tracker isa this year, and so cannot open another S&S isa until April.

I am reluctant to put too much into investment funds/s&s isas, as I don't own a property and might require the cash at any moment. The pension is a difficult one and not sure if an attractive option in my mind, as i'm in my late 20's and will not see that again for many many years.

i can say with certainty that i wont earn anywhere near this amount next year - i was more concerned about having to complete a tax return each year if i breach the higher rate now... don't HMRC make you do that?

I would rather avoid too much paperwork, as i also have some shares and therefore receive dividends; the calculations start to get a bit messy as i'm sure these are taxed slightly differently.

getmore4less

newfoundglory wrote: »

i can say with certainty that i wont earn anywhere near this amount next year - i was more concerned about having to complete a tax return each year if i breach the higher rate now... don't HMRC make you do that?

I would rather avoid too much paperwork, as i also have some shares and therefore receive dividends; the calculations start to get a bit messy as i'm sure these are taxed slightly differently.

It is your responsibility to do tax returns if you need to, so you should allready be looking at your investmnts and telling HMRC about the investment income from savings and shares(there is a short form if it is just these)

The paperwork is trivial and it is a good idea to do it anyway even if HMRC dont ask for it, they can go back and ask for it later.

if you have shares outside ISA then you need to monitor CGT anyway

even if you get the full form one year they often go back to the simple form if nothing more complicated occurs even if you are paying 40% tax

newfoundglory

My understanding is that if:

Taxable salary income (i.e. less pension contributions)
+
Interest earned (gross figure)
+
Dividends (before tax credit)
=
less than £42,475

Then no action is required on my part if all tax has been paid at the basic rate.

And presumably, I just ignore anything to do with a cash or s&s isas... so all income and dividends for these should be ignored in all calculations.

Is that correct?