Avoiding the notional 60% tax band

chucknorris

In a couple of years when I start to receive the first part of my teachers pension it looks like I may creep into the notional 60% tax band. I'm just wondering if there is anything that I may have overlooked that provides tax free income (incl. prizes like premium bonds which I already hold the max allowed). Can anyone think of conventional tax free investments or savings? I already invest as much as I am allowed in both pension and ISA, I may take another look at VCT's, but I wasn't really drawn to them a few years ago, but maybe avoiding 60% tax will get me interested.

JamesRobinson48

In the past I've tweaked various things, attempting to work around or minimize any impact of the notional 60% tax band. This was mostly fine-tuning, e.g. accelerating some taxable income into a tax year in which my marginal tax rate would still be 'only' 40%. I never considered any risky VCTs or the like, or any measures that HMRC might construe as in any way aggressive. Basically, I'm happy to pay the tax due as I consider myself fortunate.

1) Possibly start drawing some pension benefits a few months or a year ahead of schedule, bringing some taxable income a little forward at the cost of a slightly lower taxable income in the future.
2) Maybe gift to spouse certain assets which generate taxable income.
3) Perhaps orient one's equity portfolio more towards stocks that pay a lower dividend but have good potential for capital gains.
4) Consider phasing the timing of any charitable contributions.
5) In selecting savings accounts where interest will be taxable, and in deciding exactly when to close such accounts, watch out for dates on which interest is credited. Careful planning can enable more taxable interest to be received in a '40%' tax year, and less in a '60%' tax year.

chucknorris

JamesRobinson48 said:

3) Perhaps orient one's equity portfolio more towards stocks that pay a lower dividend but have good potential for capital gains.

Thanks, I had not thought of that, but it is something that I can see being worthy of consideration. 

Dazed_and_C0nfused

Do VCT's actually help in this situation?

I thought they provided a tax credit off your overall tax liability, which whilst reducing your tax liability doesn't stop the 60% rate from being applied in the first place?

chucknorris

Yes but additionally the dividend income is tax free, so my taxable income would be reduced. But I do think of it as the tail wagging the dog (compromising on what you actually want to invest in, for secondary considerations, i.e. the tax)

Dazed_and_C0nfused

Don't be confused by dividend income.

What does "tax free" mean?

£2,000 of dividend may be taxed at 0% but it is still taxable income and contributes to your adjusted net income, the reason 60% tax can occur in the first place.

Dividend income of £2,000 taxed at 0% could easily add £400 to your tax bill.

NottinghamKnight

But you don't have to report VCT dividends so presumably they will not affect your other income.

Dazed_and_C0nfused

NottinghamKnight said:

But you don't have to report VCT dividends so presumably they will not affect your other income.

Good point, forgot they were VCT 

chucknorris

Don't be confused by dividend income.

What does "tax free" mean?

£2,000 of dividend may be taxed at 0% but it is still taxable income and contributes to your adjusted net income, the reason 60% tax can occur in the first place.

Dividend income of £2,000 taxed at 0% could easily add £400 to your tax bill.

I think that it might be you who is confused, unless this link is incorrect of course:

https://www.google.com/search?rlz=1C1CHBF_en-GBGB810GB810&sxsrf=ALeKk00KFwoQu75PKoHmRWMiuBHwz31XIA%3A1605211172187&ei=JJStX935CqiGhbIP6o2LgAQ&q=do+you+have+to+report+vct+dividends+on+my+tax+return&oq=do+you+have+to+report+VCT+dividen&gs_lcp=CgZwc3ktYWIQARgAMggIIRAWEB0QHjIECCEQCjoHCAAQRxCwAzoHCCMQ6gIQJzoECCMQJzoFCAAQkQI6CAgAELEDEIMBOgsILhCxAxDHARCjAjoICC4QsQMQgwE6BQgAELEDOggIABDJAxCRAjoECAAQQzoCCAA6BQgAEMkDOgoIABDJAxAUEIcCUJ6iCliU-wpg9p0LaAJwAHgAgAGTAYgBkx2SAQUxNC4yMJgBAKABAaoBB2d3cy13aXqwAQrIAQjAAQE&sclient=psy-ab

When you invest in new VCT shares, you are entitled to claim a number of tax incentives on investments up to £200,000 each year. ... Tax-free dividends – If your VCT pays dividends, there is no tax to pay, and you won't need to declare them on your tax return.

Your confusion lies in comparing VCT's to an allowance on something that is taxable i.e. the 2k allowance on dividend income (otherwise taxable income) whereas VCT's dividends are similar to ISA and SIPP dividends (not taxable so not declared)

Dazed_and_C0nfused

Yes, I had forgotten they were VCT dividends.

But there is no allowance for dividends, there is a 0% rate band which is why (taxable 🙂) dividend income of £2,000 taxed at 0% can incur a £400 tax liability.

chucknorris

Dazed_and_C0nfused said:

Yes, I had forgotten they were VCT dividends.

But there is no allowance for dividends, there is a 0% rate band which is why (taxable 🙂) dividend income of £2,000 taxed at 0% can incur a £400 tax liability.

From the inland revenue's website: https://www.gov.uk/tax-on-dividends:

"no tax on £2,000 of dividends, because of the dividend allowance"

But maybe you think that you should contact the inland revenue and correct them! Because either they don't know what their 'dividend allowance' is, or you don't. My money is on you not knowing.