Monthly income

JohnRo

I think the lower ongoing charge and higher gearing just about swing it to EDIN for me, must admit though, tough call on which will likely prove the better option longer term based on recent numbers.

Everything is flexible, I may well add PLI in April although the plan was to include some property and infrastructure originally and that never happened, at least not directly so they'll be on the shopping list too.

bowlhead99

bluebell321 wrote: »

I am reading these threads to try and learn. Why choose bonds/bond funds to be held in ISAs rather than other forms of investment to go in the ISAs?
I understand there needs to be a mix but why specifically bonds? Because they are least risk?

If you're a basic rate taxpayer and you receive dividends from a company (or fund) outside an ISA or SIPP, you get a tax credit - on the basis that the company is paying the dividend from its after-tax profits. The level of this is such that a basic rate taxpayer has nothing more to pay. If you're a higher rate taxpayer you also get a credit but you do have some tax to pay, just not as much as your 40% or 45% headline marginal rate.

So using an ISA is not necessarily as valuable as you might have thought, certainly not if you are a basic rate taxpayer. It is only handy if you're going to make large gains on the share prices which are over your capital gains tax annual allowance and you don't want the hassle of selling the shares in smaller chunks over time to split them up into different tax years to use the allowances, or the hassle of reporting all this stuff to HMRC

However for bond interest, which companies pay out of their pre-tax income (reducing their tax bill) there is no such tax credit for the investor. Typically you would receive them net of basic tax deducted at source and then pay extra tax if you were higher rate. So, even for a basic rate taxpayer, HMRC are taking a chunk of tax off you which you would prefer to avoid by sheltering it in an ISA

If you are working inside an ISA where you have no tax to worry about, and you hold bonds, the ISA provider will claim back the tax that was deducted at source so that you get the gross interest in full.

It's not possible to get back the 'tax credit' on a dividend inside an ISA or pension. It's a virtual construct and you have not 'lost' any tax out of the headline dividend amount because you aren't paying tax inside the wrapper.

So summing up, if you get bond interest outside an ISA you will have a chunk of tax to pay. If you get dividend outside an ISA you will have nil or a smaller chunk of tax to pay.

If you get either of these inside an ISA there's no tax to pay (or anything deducted will get reclaimed for you a bit later, so effectively nothing).

Therefore if you are tight for space in your ISA, you would want to put into it the thing that will save you the most tax. That would be bonds, because there is a large difference to your net result in a bond interest coupon inside vs outside an ISA, while only a smaller difference to your net result of a dividend inside vs outside an ISA.

TCA

JohnRo wrote: »

Trimmed Bankers & Finsbury today, down to £3K in each with a view to snaffling £5K worth of EDIN if it'll just slide a bit further. Put in a market order today for EDIN but couldn't snag the price I was looking for.

EDIN down at 572p as I type. Might hopefully drop further when Wall Street opens. Getting anywhere near your snag price John? At a discount of 3 to 4% and a dividend imminent, it's looking quite good.

grizzly1911

TCA wrote: »

EDIN down at 572p as I type. Might hopefully drop further when Wall Street opens. Getting anywhere near your snag price John? At a discount of 3 to 4% and a dividend imminent, it's looking quite good.

When do they go XD?

JohnRo

Got back to find the order has gone through, dealt at 572, was never going to be perfect but it's lower than yesterdays attempt and at least its in the bag now whatever happens. Game on.

mf78

bowlhead99 wrote: »

If you're a basic rate taxpayer and you receive dividends from a company (or fund) outside an ISA or SIPP, you get a tax credit - on the basis that the company is paying the dividend from its after-tax profits. The level of this is such that a basic rate taxpayer has nothing more to pay. If you're a higher rate taxpayer you also get a credit but you do have some tax to pay, just not as much as your 40% or 45% headline marginal rate.

So using an ISA is not necessarily as valuable as you might have thought, certainly not if you are a basic rate taxpayer. It is only handy if you're going to make large gains on the share prices which are over your capital gains tax annual allowance and you don't want the hassle of selling the shares in smaller chunks over time to split them up into different tax years to use the allowances, or the hassle of reporting all this stuff to HMRC

However for bond interest, which companies pay out of their pre-tax income (reducing their tax bill) there is no such tax credit for the investor. Typically you would receive them net of basic tax deducted at source and then pay extra tax if you were higher rate. So, even for a basic rate taxpayer, HMRC are taking a chunk of tax off you which you would prefer to avoid by sheltering it in an ISA

If you are working inside an ISA where you have no tax to worry about, and you hold bonds, the ISA provider will claim back the tax that was deducted at source so that you get the gross interest in full.

It's not possible to get back the 'tax credit' on a dividend inside an ISA or pension. It's a virtual construct and you have not 'lost' any tax out of the headline dividend amount because you aren't paying tax inside the wrapper.

So summing up, if you get bond interest outside an ISA you will have a chunk of tax to pay. If you get dividend outside an ISA you will have nil or a smaller chunk of tax to pay.

If you get either of these inside an ISA there's no tax to pay (or anything deducted will get reclaimed for you a bit later, so effectively nothing).

Therefore if you are tight for space in your ISA, you would want to put into it the thing that will save you the most tax. That would be bonds, because there is a large difference to your net result in a bond interest coupon inside vs outside an ISA, while only a smaller difference to your net result of a dividend inside vs outside an ISA.

Thanks for that very helpful post. I've been trying to figure out something similar. I've just received my first dividend payments within my SIPP since opening it. As I'm self employed, will I need to enter the dividend amount and tax credit into my self-assessment form, to get the benefit of the tax credit? I wasn't sure, with this being inside a pension.

bowlhead99

mf78 wrote: »

Thanks for that very helpful post. I've been trying to figure out something similar. I've just received my first dividend payments within my SIPP since opening it. As I'm self employed, will I need to enter the dividend amount and tax credit into my self-assessment form, to get the benefit of the tax credit? I wasn't sure, with this being inside a pension.

If you're receiving something inside an ISA or a SIPP, you have not paid any tax at all. There is no credit to receive because you haven't suffered any tax. You got the exact number of pennies per share that the company declared. The government can't see inside your SIPP wrapper and doesn't care what is in it. You don't report any buys, sells, dividends.

If you were doing this outside a wrapper, and you had to pay tax on dividend income, after the company paying the dividends has already paid tax themselves when earning the money they send you, you might be a bit miffed. Two taxes on the same corporate profits seems a bit harsh. So the government says OK, you can have enough of a tax credit to cover a basic rate taxpayer's liability on this type of income - nothing further to pay for you.

The net result is the income has only been taxed once (at corporate level) not twice. A high rate taxpayer would still be paying, a cross we must bear for being fortunate with our incomes, but he can still use the credit to get some sort of break.

If you are doing it inside a wrapper, you can never be in a situation where you need to pay tax on the underlying income that the company already paid tax on, paying tax twice on the same income stream. You are tax free. The company pays its taxes and gives you what's left. You receive all it sends you. So there is no concept of having suffered tax twice and needing to get back to once. So there is no faffing about trying to claim a credit.

mf78

Ok thanks. Its just that when I received the notification of a dividend having been paid, it also listed the amount of tax paid. I just wondered if I needed to keep records of this in case I could use it to reduce the amount of tax I'll need to pay on my income.

TCA

grizzly1911 wrote: »

When do they go XD?

I had a quick look yesterday for the ex dividend date for EDIN but couldn't find anything. Perhaps it's not been declared yet?

JohnRo

I'm assuming it'll be around about the same time of year as it has been previously

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=ITEDIN&univ=T&pagetype=dividends

so some time towards mid Nov.