Paying Tax on interest

DennisTenus

Hi,

I ended up paying tax on interest income recently because I'm higher rate tax payer so allowance is only £500.

So that I do all I can to avoid or limit this as much as possible in future, I'm going to max out ISA and Premium Bonds (as prizes, although not guaranteed are tax free).

Are there any other ways apart from putting more in pension?

Thanks

bowlhead99

Often it can be better as a net result to get a higher rate of interest and pay the tax, rather than save at a relatively low rate of interest in a cash ISA and not need to pay tax. So if you want to get the most interest and don't care how much effort it is, make sure you have taken advantage of the various current accounts and regular saver accounts that offer 3, 4 or 5%.

PBs are not too bad (as a higher rate taxpayer) for an instant access product if you want a bit of fun and have a reasonably large amount of cash so that you need the £50k limit, as an alternative to just stuffing smaller amounts of money into the current accounts and regular savers; though returns are obviously variable and it can take a while to get to the first payout given there is only one drawing a month, if you don't time your purchases efficiently.

For a high rate taxpayer (especially if you don't expect to be higher rate in retirement, in line with the vast majority of us), pension is a great thing to do for the tax relief. £60 of your net pay becomes £100 in the pension, which even after eventually being partially taxed in retirement should give a return that's massively better than a premium bond or cash or S&S ISA. However, money committed to a pension can't be accessed until your late 50s, which is the price you pay to get access to the great returns.

DennisTenus

Yeah I should have mentioned I have about 10 current accounts and about 6 regular savers hence why I'm way over the £500 allowance.

So sounds like there isn't any other options.

I wondered about VCT investments, but understand NONE of them are LOW risk?

Dazed_and_confused

VCT tax relief will not have any impact on the tax charged on savings interest.

Any VCT tax relief due simply reduces your overall tax liability, it does not change how the liability is calculated in the first place.

And there is no "allowance" for savings interest. £500 of taxable savings interest might be taxed at a 0% rate (the savings nil rate, aka Personal Savings Allowance) but that can mean there would still be an overall increase in the amount payable for the year simply by having the additional £500 taxable income. Even when it is taxed at a 0% tax rate.

For example it might increase the High Income Child Benefit Charge for some people.

bowlhead99

DennisTenus wrote: »

I wondered about VCT investments, but understand NONE of them are LOW risk?

Correct. The government only gives you the 30% income tax relief to knock off your total tax bill - whether that tax bill came from interest income, salary, whatever - and allows the trust to be exempt from income and capital gains taxes... to incentivise you to make risk capital investments.

The Europe-wide state-aid rules mean they can't just give you a tax break for investing in companies that are well established, or structured so that your investment is replacement of existing capital (like a management buy out) rather than new capital for expansion or development.

New investments made by VCTs which are structured to be low investment risk, run the risk of having their VCT status voided by HMRC meaning you'd have to pay back income tax relief that you'd claimed.

A small percentage out of your overall portfolio invested into VCTs is fine - sure, why not make the most of all tax-efficient opportunities you get. But diversifying over five or six VCTs with a few thousand in each, with that total only being a fraction of your total investments, implies a pretty big total portfolio.

As you might need to wait a decade to extract value from the VCTs ,(because the minimum hold period for the tax benefits might not be long enough for the underlying investments to come to fruition), you might find locking the money away in more mainstream investments within a pension is not too bad after all.

chamelion

controversial view here, but try P2P if you have appetite for risk? I'm steady at 6-6.5% on funding circle for the past 6 years.

capital0ne

Simple way to reduce tax, transfer savings to your partner (assuming you have one and they aren't higher rate tax payers)

Reed_Richards

capital0ne wrote: »

Simple way to reduce tax, transfer savings to your partner...

Or transfer savings to a shop in exchange for goods or services.

Dazed_and_confused

Simple way to reduce tax, transfer savings to your partner (assuming you have one and they aren't higher rate tax payers)

But then you have lost the capital as well, a slightly bigger concern that whatever tax you would be paying if it was still your own money!

Thrugelmir

DennisTenus wrote: »

I wondered about VCT investments, but understand NONE of them are LOW risk?

Nor are charges particularly low.

DennisTenus

chamelion wrote: »

controversial view here, but try P2P if you have appetite for risk? I'm steady at 6-6.5% on funding circle for the past 6 years.

I do have a little bit in P2P but I'd still pay tax on the interest wouldn't I?

capital0ne wrote: »

Simple way to reduce tax, transfer savings to your partner (assuming you have one and they aren't higher rate tax payers)

Don't have one

Reed_Richards wrote: »

Or transfer savings to a shop in exchange for goods or services.

Confused?! You mean spend it basically?