Loans are tax efficient

Legacy_user

With loans you pay now using future earnings, if you do that you won't have to work overtime paying lots of tax, and the future earnings you do pay from will be less taxed and may even include tax credits. Obviously caution is needed and quick repayment, hopefully you never need to borrow, but I do think it can be more efficient in the right situations

Caz3121

I doubt you will find anyone who will agree with you even by opening up a duplicate post..
https://forums.moneysavingexpert.com/discussion/5358513

System

That's because it challenges deep rooted ideas, 'loan' is a dirty word but overtime certainly isn't moneysaving or time saving when you see all that tax, and I'm saying that sometimes loans might be the lesser of evils...

glentoran99

you're talking complete nonsense,


Overtime earn £100- even if you paid 99% tax then you would have £1 in your pocket


Borrow £100 at equally ridiculous levels of say 0.5% interest you have -50p in your pocket


So in what world is -50p better than +£1


Yes you don't have to work but financially, as your arguing, its garbage

ViolaLass

MatthewAinsworth wrote: »

With loans you pay now using future earnings, if you do that you won't have to work overtime paying lots of tax, and the future earnings you do pay from will be less taxed and may even include tax credits. Obviously caution is needed and quick repayment, hopefully you never need to borrow, but I do think it can be more efficient in the right situations

Loans aren't (mostly) paid from gross pay.

System

Not about what's in your pocket, but how many hours you have to work to fund something, if the interest is paid from regular income it may take fewer hours than you would've put into overtime initially

System

You get 10k tax free allowance and tax credits below a certain income, not gross, but better than o/t

foxy-stoat

MatthewAinsworth wrote: »

You get 10k tax free allowance and tax credits below a certain income, not gross, but better than o/t

You can kind of win your argument in certain circumstances, depending on you earning £1 less than the tax free allowance:

If you are earning £10599 gross (wont include tax credits as even the goverment cant work out how much to pay out), then earn another £200 gross, yes, you will be taxed on the extra money. So for your 30 odd hours a month over time at £6.66 an hour you will take home £150, roughly.

Do that once a month for a year, save.....yes SAVE the extra £150 and you will have £1800 per year plus a few pence interest you earn, or buy Premium Bonds every month and you may get a £25 or a big win (unlikely but possible).

Now you could borrow £1800 and pay it over 12 months, the cheapest few loans on the meerkats is around £160 a month for 12 months but you will lose £160 a month out of your normal wages (at zero tax) to make the loan repayments or if you have to work overtime (at 25% tax) then you have work over 30 hours to earn slightly over £200 a month gross to pay the same amount. Of course you have to factor in the £120 interest that you are paying for loan, £10 a month.

So to answer your thread question, in some circumstances, a loan can be more tax efficient way to get a lump of money. I still wouldnt do it on this wage, I would be saving money rather than borrowing.

Of course, if you are unable to save £150 a month from your standard income or £160 a month for the loan repayments then you have to work the overtime anyway.

If you CAN save £150 out of your monthly budget then do it EVERYTIME, it will save you the interest on the loan and the worry should anything go wrong or you have an unexpected bill. The interest is only £10 a month if you can get the cheapest rate but you may find that the actual rate you get is a lot more.

I think that is the twisted point the OP is saying.

Pointless thread can be locked now !

System

Not pointles as you could be paying off a mortgage with significant spare income but find yourself cut short when a big ticket expense comes, like a wedding, car repairs, etc, or even investment. This is also about whether people on mortgages should actually bother doing overtime to repay them, it is sad when people end up putting in more hours than they need to overall, especially when it impacts family time. As well as that overtime increases the labour supply, taking jobs and depressing wages. I appreciate you taking the numbers seriously and I certainly do mean quick repayment at low interest. I myself am on a low income but pay tax and recieve tax credits, so the difference between overtime and regular work is much bigger for me

redux

There is no tax relief on loans, unless it's a loan taken out by a business for business purposes.

Part of your argument can be countered by what you yourself are saying. If someone works overtime they are probably getting an enhanced rate per hour, so could pay back a loan more quickly in fewer hours work. And sooner by doing it this month instead of next, so also slightly reducing interest.

Unless working overtime takes someone marginally into a higher tax band this would have no detrimental tax effect at all. And if that did happen they could make a larger pension contribution and reduce themselves out of the higher band.

foxy-stoat

This is all about enjoying your money and time when your young rather than "saving/investing" it for your older years. You need to find the correct balance.

I think being able to finish my mortgage before I am 55 is a better prospect than paying it back when I reach retirement age 65+ as no one knows for sure whats going to happen in 15 or 20 years time.

The system of tax credits and benefits does not reward work as some folk will earn just about what is required to get the most out of the tax credit system rather than earn as much as they can and maybe taking home less.

You either play the system or feed the system.