Personal Savings Allowance/Tax Rate Query

bowlhead99

Or, whatever profit you make on the P2P just put that amount of money into a pension.

Say the P2P interest is £1k over and above your £500 free limit. You would owe HMRC £600 tax on the £1k income. But you could make gross pension contributions of £1k which would save you £600 of tax. So you would end up with your P2P profits safely inside your pension wrapper growing tax free until you near retirement and then you can take them out (when presumably you won't be a 60% taxpayer)...

The way you achieve that in practice is to make £800 contribution to a pension which the pension provider grosses up to £1000 as if you were a basic rate taxpayer, and then HMRC give you back the other £400 so that you've had total £600 tax relief on the gross £1000.

As a result you would have had £1000 of P2P income... of which you put £800 into the pension... leaving you £200 cash in your hand..., then HMRC give you back £400 tax relief, so you have £600 in your hand... and then you can give HMRC the £600 tax you owe them on your P2P income. Net result is that you have your £1000 that you earned from P2P sitting inside a pension wrapper nicely protected and you haven't suffered 60% tax after all.

Without the crazy high tax, you don't need to fear that the risk/reward from your P2P endeavours is poor due to supertax. Of course, the risk/reward might still be poor on its own merits depending on what you are picking to invest in, but it won't be tax's fault.

nirish

bowlhead99 wrote: »

Or, whatever profit you make on the P2P just put that amount of money into a pension.

I feel guilty following that lengthy and well scripted concept but my lifetime allowance for my pension pot is due to be maxed out as it is I'm afraid ....

bowlhead99

nirish wrote: »

I feel guilty following that lengthy and well scripted concept but my lifetime allowance for my pension pot is due to be maxed out as it is I'm afraid ....

Damn you!

Thought I should mention it if you are looking elsewhere as it's surprising what relatively wealthy people don't know what they could do with their money

I guess next stop if you have maxed pension and ISA and are looking to invest in tax efficient stuff is VCTs.

If you haven't maxed ISA (which you haven't if you are talking about waiting for IFP2P ISA) you could do that with a mixture of cash and investment funds. With lifetime allowance hit and stopping you stuff your pension, it should be relatively easy for a high earner to max their ISA allowances every year, and so any year missed is tens of thousands of pounds worth of tax wrapper (by the time its contents grow over the next few decades) foregone.

Snakey

Dazed_and_confused wrote: »

But the £500 is "taxable" so salary £100,000 and total interest for the year of £500 will result in loss of £250 of the personal allowance even though there is no tax to be paid on the interest (tax due on the interest being £500 x 0%)

Yep, scary stuff. Conceptually, if your other income* takes you into the 60% band, the first £500 of your interest income will (effectively) be taxed at 20% and the rest of it** at 60%. It's not quite how it "works", but it's the end result.

I believe the £5k dividend exemption (in fact not an exemption but a nil rate band) works the same way too, although I haven't had cause to look this up.

*excluding dividends, in case anybody was feeling tempted to go way off topic
**unless it's a large enough amount to take you all the way through the 60% band and into the clear waters of 40% again.