Become more tax efficient and reduce taxable income

newfoundglory

I have recently been fortunate enough to get a pay rise at work. This is going to take me much closer to the higher rate - basic income probably going to be high-30s.

I always use my cash isa allowance, but outside of that I have a further £130k in cash savings - currently saving about £1000 per month.

During the previous tax year i did some overtime/shift working which temporarily upped my income substantially. As a result I decided to shift interest from savings to annual payments where possible so that it would be paid out during this tax year when I was sure I would be well under 40pc band - I avoided becoming a higher rate payer last year as a result.

Interest from the last 12 months is due to be paid later this year and will probably be up to 3 grand (gross income). Other interest is still paid monthly which I can’t change and I also get dividend payments from some individual share holdings.

I am aware that general advice is contribute more to your pension, however I have a civil service pension - i'm also in my late twenties so this doesn't really strike me as a very attractive option in my mind. Unless I have missed something here. I find it really hard to see what i’m getting for that money.

I wondered if I should maybe consider a SIPP which might be more attractive option for me. (Especially if the government puts in 40 per cent, but i don’t know if thats the case). I don’t think I understand SIPPs enough to know if thats a good choice or not for me.

I don't own a home, so my primary focus is on saving cash to buy one.

I’ve been considering moving £30k into Premium Bonds (only because prizes are tax-free) and trying to work out what might be a good way of using the Stocks and Shares part of the ISA allowance, something I would usually only dabble small amounts with.

With interest rates now at rock bottom and holding all this cash until home purchase this is a very short-term problem for me - i’m not going to be a higher rate payer going forward.

Does anyone have any thoughts on what might be a good course of action?

xylophone

If you wish to continue owning shares you might as well hold them in an isa? You could bed and isa - you could also bed and SIPP.

You might wish to consider a SIPP- one day flexible drawdown might be helpful to you.

You might consider getting on with buying the house using an offset mortgage.

http://www.hl.co.uk/shares/bed--and--isa-sipp
http://www.thisismoney.co.uk/money/mortgageshome/article-2034571/Offset-mortgage-calculator.html

kidmugsy

If you are feeling very courageous (in Sir Humphrey's sense) you could try investing in VCTs. You get back 30% as income tax relief.

grey_gym_sock

if you're only just starting to think about S&S ISAs, then i wouldn't dream of using VCTs.

is your priority to build up your deposit for a house? it may be reasonable to pay a little 40% tax, so that the 60% you keep increases your deposit.

if you have (or will have) plenty of deposit anyway, then perhaps put it in a pension. if you contribute just the part of your income that would otherwise be taxed at 40%, then you do get 40% relief on it. this could be either AVCs with your employer scheme, or a separate SIPP.