Crazy Tax System

Babycakes

I have been sent a tax return

I am on PAYE and have no other income.

I have a £220,000 mortgage for my house, which I purchased last year. I pay 3% per annum in interest

I deliberately kept back £100,000 to pay for building work on my house, which I put in an interest bearing account earning 1.5% interest before tax.

Now the taxman says that I have to pay 40% tax on the interest for my £100,000 savings, in spite of the fact that it is from borrowed money that is I already pay 3% interest on. This means that I effectively have a mortgage rate of 3.9%.

I realise I have been stupid but is there anything I can do about this apart from paying off my mortgage and not doing the building works. The tax man gets less from me next year and I spend less on building works, which in a small way is worse for the economy.

booksurr

there has been miscommunication between you and HMRC

how much mortgage you have and at what rate has no impact at all on how much income tax you pay

it appears you have 2 sources of income:
a) your job which is taxed via PAYE
b) savings of at least 100k earning £1,500 pa interest
c) any other income sources eg: dividends, taxable benefits etc

if a+ b + c = >£41,865 you will pay 40%tax on the excess over that amount. If it doesn't you won't

either you or HMRC have some facts and figures wrong

However, do note carefully that having been sent a tax return you MUST submit it otherwise you will automatically be charged £100 penalty even if there is zero tax to pay. You must continue submit tax returns until HMRC positively tell you not to

Babycakes

My PAYE salary is greater than £41,865. That means that I pay 40% tax on my savings.

However my issue is that my savings are not true savings, they are from borrowed money. I pay more interest on my £100k than I receive in gross interest from the building society.

I think this is grossly unfair and if I was running a business, I could claim tax relief on my loan interest. As an individual, I cannot.

I think that I will pay my mortgage with the £100k and forget the extension.

The tax system has cost me money due to my ignorance. Meanwhile, Amazon continues to get away without paying its share.

ermine

is there anything I can do about this apart from paying off my mortgage and not doing the building works.

I suppose you could cut off your nose to spite your face and not do the building works. Alternatives are to suck in your gut and pay 40% of *drum roll* £1500 which is, I guess £600. You will still be *shock*horror* £900 better off than if you did the other way to avoid paying tax, lob the cash into a non interest paying account.

On the grand scheme of things with that amount of building works to do you may as well get on with your life. I guess you and a partner could lob £30k into a cash ISA this year and another £30k into a cash ISA next year as one way to minimise the tax payable. the trouble is the interest on cash ISAs is pretty poor these days, but at least the taxman doesn't get to see any of it and all you have to do is get an ISA interest rate of >0.9% to be in the same place-ish. Talking of partners, if you have a non 40% taxpaying partner if you give them the money and they save it your tax bill comes down to 20%.

I'd class this one as both #firstworldprobem and #middleclassproblem personally, as surely getting your place the way you want it is more important that not giving the taxman the £600, but if you want to stick in in a zero-interest paying account and lose £1500 instead there's nothing to stop you... At least the taxman won't get his sweaty mitts on another £600

zagfles

Why don't you get an offset account, where you get no interest on the savings but the savings amount is subtracted from the mortgage amount for interest charging purposes.

Or better, a flexible mortgage where you can make overpayments and withdraw them when you need them.

Babycakes

Thanks for the offset account suggestion. That seems like a good idea.

I just think that the tax system is hugely unfair because I am not actually benefiting from the savings interest, it just makes holding the cash less expensive.

I do not mind paying income tax on "income" but the interest on my savings is not income per se - it just means that I pay slightly less mortgage interest.

Daniel54

Babycakes wrote: »

Now the taxman says that I have to pay 40% tax on the interest for my £100,000 savings, in spite of the fact that it is from borrowed money that is I already pay 3% interest on. This means that I effectively have a mortgage rate of 3.9%.
.

Your arithmetic is wrong.

You start off with £100,000 which costs you £3000 to borrow -your decision

After one year you wll have £100,900 to spend on your extension and still have borrowing costs of £3000

Or you can keep the £100,000 and offset the £900 net earned interest,reducing the total interest to £2,100

You do not pay 3.9 % interest on £100.000.You either pay 2.97% on £100,900 or 2.1% on £100,000

There is nothing unfair about you being taxed on unearned income.It applies to everyone.

If you don't need to spend the money yet,then it seems sensible to earn interest on it to either reduce your borrowing costs or increase the amount you have available to spend when you finally build the extension

TheCyclingProgrammer

Babycakes wrote: »

The tax system has cost me money due to my ignorance.

Not it hasn't. You're paying approx. 3% pa interest on the £100k loan. You're making 1.5% interest on that £100k while it sits in a savings account. That £1500 is taxed at 40%, meaning you have £600 tax to pay, but that still leaves you £900 better off than if the £100k was sitting in a non-interest bearing account or in a briefcase under your bed.

TheCyclingProgrammer

Babycakes wrote: »

I just think that the tax system is hugely unfair because I am not actually benefiting from the savings interest, it just makes holding the cash less expensive.

Can you not see the complete contradiction in what you just wrote? The interest you've earned, after tax, has still reduced the cost of that £100k loan by £900. How is that not benefitting from it?

As somebody has mentioned above, the only way to benefit from reduced interest on your loan without paying tax is to use an offset account so your interest is effectively reduced by the equivalent amount but without you being in receipt of any taxable income.

agrinnall

Would it not have been possible for you to delay drawing down the £100,000 from your mortgage until you needed it?