Income Tax

jamesd

Yes investment income counts as income for income tax unless it is in an ISA.

You really should get on with moving things. If nothing else it means that you won't have to track every purchase and sale transaction so you can make a capital gains tax filing with HMRC. That's required if the value of investments sold is four times the annual CGT allowance even if no CGT is due. But not if the investments are inside an ISA or pension, neither reporting need nor CGT.

Bond and bond fund interest is taxable outside an ISA as interest income. But not if inside an ISA, so a quick and easy move is to put interest-paying funds into the ISAs first. If you look at the fund details you should see a mention of whether its distributions (payments) are interest or dividend. For example you can see here that:

Invesco Perpetual Distribution is paying interest: "Type of payment: Interest"
CF Woodford Equity Income is paying dividends: "Type of payment: Dividend"

When the payment type is interest it can be part of your £1k per person Personal Saving Allowance for interest if outside an ISA. So given your income level again you probably won't be paying income tax on it.

If you hold accumulation rather than income units in a fund outside an ISA each time a payment is made internally within the fund that's a new purchase by you that needs to be accounted for. A big pain if CGT reporting is needed, so better to use income units outside an ISA or pension so you avoid that. Then you make an explicit decision whether to buy and will notice it happening. For the 50k or so value of investments that you seem to have each this probably won't affect you but still best to avoid the issue entirely by holding inside an ISA.

Hopefully you're both continuing to make pension contributions and taking your £720 a year of extra income for that if you have £2,700 of unused income tax personal allowance, less if some isn't within the personal allowance.

What doesn't count as income is the proceeds from selling capital in investments. That is just potentially subject to capital gains tax if outside an ISA or pension.

Each of you has to account for these things individually. You don't get to work out the total taxable amount taken then split it between the two of you. Instead each of you owns some of the investments and has the tax liability for what they hold. You can freely give each other investments outside an ISA, though, with no tax charge for doing it. That may allow you to balance out the income more evenly between you.

All in all, get the investments into an ISA. It eliminates a lot of potential hassle and future potential income tax liability. You could forget everything I wrote in this post except make pension contributions if you'd already moved the money into ISAs.

bigfreddiel

PaulMTC wrote: »

How do you arrive at 17k bigfreddie?

See post #8, almost correct, but you also get £5k tax free interest on top of the £1k if your income is below the tax free allowance of £11k. It's all on the .gov hmrc web pages. So you can actually get up to £22k tax free income.

Cheers fj

bigfreddiel

DFChamp wrote: »

Sorry for not getting back sooner. Been out all day.

I thought I had this sussed and even asked a similar question last year but I am now starting to have nightmares about getting a bill from the tax man.

We invest via Cofunds. Approximately £55k each in Investment ISAs and a joint investment fund plan outside of ISAs amounting to about £47k.

This is all set up via a third party (FA) in an Income Portfolio which we draw down on each month to supplement our pensions. The FA did recommend moving the non-ISA funds over into ISAs each year until it was all moved over but I chose not to because I just felt is was unnecessary. But now I'm not so sure.

You should be using your ISA allowance every year if you are in a position to do so. This will save you tax, obviously, and from keeping records for you tax return, but I think this had all been mentioned already.

Cheers fj

dunstonh

This is all set up via a third party (FA) in an Income Portfolio which we draw down on each month to supplement our pensions. The FA did recommend moving the non-ISA funds over into ISAs each year until it was all moved over but I chose not to because I just felt is was unnecessary. But now I'm not so sure.

That transaction is known as bed & ISA. You should have done it.

DFChamp

dunstonh wrote: »

That transaction is known as bed & ISA. You should have done it.

Being under the personal tax allowance threshold it just didn't seem to matter at the time.

DFChamp

jamesd wrote: »

Yes investment income counts as income for income tax unless it is in an ISA.

Okay thanks. Lets just put aside the pension contribution suggestions for now. But thanks for the heads up.

With a pension income of £9168 for me and £3377 for my husband and a joint draw down of £9600, (in simple terms) are you saying that my income for tax purposes is £13968 and therefore approx £3k is taxable on my income? And with approx £8177 my husband's is still under the personal allowance threshold?

But if it was all held in an ISA wrapper, the draw down income would not count in the same way as above?

Excuse my ignorance but with the sort of responses flying around that my question has generated you can start to see why I am floundering here.

I am grateful for the time you are spending on this for me.

jamesd

Yes, in simple terms there is potentially income tax due for you and not for him.

In less simple terms it depends on the exact nature of the income so it can be worked out whether it's covered by the various savings/interest allowances on top of the personal allowance. You just might escape any income tax still. Remember here also that there is no income tax to pay on any investments you sell, just potential CGT if over the threshold for that. Since we don't know the exact breakdown of the drawing we can't say what the actual situation is going to be.

And of course you could avoid that income tax by giving him the investments that are paying most income to use his allowances rather than yours. Then he can give them back in chunks as you move things into an ISA. If you want to keep things neutral in asset value you could give him ones paying interest and he could give you ones of the same value from which no drawing or only capital sales drawing is taking place.

And yes, no tax at all to pay if it was inside an ISA. Not income tax, nor CGT.

DFChamp

[QUOTEYes, in simple terms there is potentially income tax due for you and not for him.

In less simple terms it depends on the exact nature of the income so it can be worked out whether it's covered by the various savings/interest allowances on top of the personal allowance. You just might escape any income tax still. Remember here also that there is no income tax to pay on any investments you sell, just potential CGT if over the threshold for that. Since we don't know the exact breakdown of the drawing we can't say what the actual situation is going to be.

And of course you could avoid that income tax by giving him the investments that are paying most income to use his allowances rather than yours. Then he can give them back in chunks as you move things into an ISA. If you want to keep things neutral in asset value you could give him ones paying interest and he could give you ones of the same value from which no drawing or only capital sales drawing is taking place.

And yes, no tax at all to pay if it was inside an ISA. Not income tax, nor CGT./QUOTE]

Thanks. This is what I suspected. And yes, the reason I didn't think it was worth bothering with moving to ISAs was because we would probably escape any tax due to all of the above. So my first step will be to get as much into ISAs as I can this tax year and then the remainder moved over next year. We haven't completed tax returns as we were always PAYE. I suppose I need to speak to HMRC.

Eco_Miser

DFChamp wrote: »

With a pension income of £9168 for me and £3377 for my husband and a joint draw down of £9600, (in simple terms) are you saying that my income for tax purposes is £13968 and therefore approx £3k is taxable on my income? And with approx £8177 my husband's is still under the personal allowance threshold?

It depends such a lot on what you are calling draw down.

First anything inside an ISA is completely ignored, both in tax returns and in what follows.

The first £5000 of dividend income is tax-free, so if it is all dividend income and split evenly between you (or all your husband's) there would be no tax.

The first £1000 of interest (including interest on bonds) is tax free, as is the next £5000 in your situation (0% Beginning rate on Savings Interest).

Any of your original capital that you take from the investment is not income, so no income tax.

Any capital gain on on sold investments is potentially liable to Capital Gains Tax, but the first £11,100 each is exempt, and you can't have exceeded that only drawing £9,600, so no tax there.

So, unless you personally have more than £5000 dividend income or more than £6000 interest, there should be no tax payable. Even then you've got some Personal Allowance to set against it.

If you do have that much income give your husband the income generating asset(s) to avoid the problem in future years.

BTW, when quoting, make sure the square brackets round QUOTE and /QUOTE don't get deleted

jamesd

DFChamp wrote: »

We haven't completed tax returns as we were always PAYE. I suppose I need to speak to HMRC.

Well, if you prefer you could describe the ways you've been drawing for each tax year and we might end up being able to tell you it's not necessary to tell HMRC anything. There's a pretty good chance that we could end up doing that.