Minimising capital gains tax

aroominyork

ColdIron said:

aroominyork said:

ColdIron said:

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP? Hence 'salary cap' is poor shorthand for all earnings on which income tax (20%/40%/45%) is paid - is that correct?

As above, pension contributions do not increase your £40,000 annual allowance (let's not get into carry forward). However you asked ...

On the contrary, I am happy to take carry forward into account because OH and I both have some available. So using carry forward can I reclaim HRT by paying (in my example) £70,000 gross into SIPP?

ColdIron said:

Capital gains are capital gains and subject to capital gains tax. Perhaps you mean the treatment of dividends for bond funds. If your fund(s) are less than 40% equities then the distributions are treated as interest and not dividends. Could be good or bad for you depending upon your circumstances. SIPP contributions wouldn't affect this

This abrdn site says "The bondholder only pays income tax on bond income and gains when certain taxable events happen, known as chargeable events." That suggests capital gains on bond funds are taxed as income/interest and not taxed through CGT.

ColdIron

aroominyork said:

ColdIron said:

aroominyork said:

ColdIron said:

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP? Hence 'salary cap' is poor shorthand for all earnings on which income tax (20%/40%/45%) is paid - is that correct?

As above, pension contributions do not increase your £40,000 annual allowance (let's not get into carry forward). However you asked ...

On the contrary, I am happy to take carry forward into account because OH and I both have some available. So using carry forward can I reclaim HRT by paying (in my example) £70,000 gross into SIPP?

Take it into account by all means. The only reason I suggested we ignore it was that it only muddies the waters as it's not germane to the question you asked

But ...

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP?

If you earn £60,000 (excluding the £10,000 interest as that is not earnings) and you have £20,000 unused allowance from the previous three years you can use it to increase the £40,000 annual allowance and make a higher SIPP contribution. Your contribution would raise the HRT tax threshold thus allowing you to pay less higher rate tax. Just as it would without carry forward

This abrdn site says "The bondholder only pays income tax on bond income and gains when certain taxable events happen, known as chargeable events." That suggests capital gains on bond funds are taxed as income/interest and not taxed through CGT.

I think that is referring to Investment Bonds which are a different financial instrument, confusing isn't it? There are many many types of 'bond'

HM Revenue & Customs (HMRC) define an investment bond in its Insurance Policyholder Taxation Manual (IPTM) as:

• Generally a unit-linked, single premium whole of life or endowment policy providing minimal guaranteed death benefits, and often capable of surrender without penalty, particularly later in the term. An investment rather than insurance in the general sense.

I would defer to dunstonh concerning those as I have little familiarity with them

jimjames

aroominyork said:

Thrugelmir said:

To minimise your CGT liability you first need to make the gains. Putting the cart before the horse possibly. 

Or possibly not since you do not know my circumstances, or my preference to know how to plan if gains are made.

It might help to explain a bit more then. I was thinking the same as Thugelmir. There is no CGT on cash which is what you imply are receiving. If you have gains from existing investments then it might be handy to detail them to work out the efficient CGT options although now it appears to have moved on to pension allowances which may negate it anyway.

aroominyork

ColdIron said:

If you earn £60,000 (excluding the £10,000 interest as that is not earnings) and you have £20,000 unused allowance from the previous three years you can use it to increase the £40,000 annual allowance and make a higher SIPP contribution. Your contribution would raise the HRT tax threshold thus allowing you to pay less higher rate tax. Just as it would without carry forward

I'm still not quite there... my question is: if I have £60k salary and £10k interest, what is the most I can pay into a SIPP assuming I have sufficient carry forward? Is it £60k or £70k?

ColdIron

It's £60,000

NedS

aroominyork said:

I'm still not quite there... my question is: if I have £60k salary and £10k interest, what is the most I can pay into a SIPP assuming I have sufficient carry forward? Is it £60k or £70k?

 As @ColdIron states, you have £60k salary so you can contribute £60k gross (assuming you have £20k of carry forward available). You cannot contribute more than you earn through work/employment.

aroominyork

So the bottom line is that tax paid on dividends, on interest or as CGT stays with the Exchequer: it is not possible to recover it through additional SIPP contributions as with tax paid on work/employment?

EdSwippet

aroominyork said:

So the bottom line is that tax paid on dividends, on interest or as CGT stays with the Exchequer: it is not possible to recover it through additional SIPP contributions as with tax paid on work/employment?

Yes, not possible. From HMRC: Earnings that attract tax relief. Interest, dividends, and capital gains are not "relevant UK earnings".

ColdIron

As I say, SIPP contributions will raise the higher rate tax threshold from £50,270 so you would pay less HRT (and more basic rate tax) on earnings and/or interest

If your dividends were subject to HRT (32.5%) they (or some portion of) would only be taxed at 7.5%. I am on less comfortable ground with CGT in this respect but I believe the effect would be the same, e.g. 10% CGT instead of 20%

It could even take you out of HRT altogether. That might restore your £1,000 Personal Savings Allowance from £500 if needed

Last year I made a £3,600 gross SIPP contribution and HMRC raised the threshold from £37,500 (£50,000 - £12,500) to £41,100 (2021/22 rates and thresholds). This is how my self assessment reported it

HTH

aroominyork

EdSwippet said:

aroominyork said:

So the bottom line is that tax paid on dividends, on interest or as CGT stays with the Exchequer: it is not possible to recover it through additional SIPP contributions as with tax paid on work/employment?

Yes, not possible. From HMRC: Earnings that attract tax relief. Interest, dividends, and capital gains are not "relevant UK earnings".

Many thanks. Very handy that you have access to internal HMRC manuals!

This is my summary of tax treatment on income and sales of various asset types – is it correct?

1)            Earnings, including state pension and SIPP withdrawals. Personal allowance, then basic or higher rate tax.

2)            Interest on products with >60% fixed income and held outside tax wrapper. £1000/£500 allowance then taxed at marginal income tax rate.

3)            Dividends on products with <60% fixed income and held outside tax wrapper. Calculated after earnings for tax purposes, £2000 allowance then taxed at 8.75% basic / 33.75% higher rate.

4)            CGT. £12,300 allowance then taxed at 10% basic / 20% higher rates. Losses can be carried forward for one year.