My only income is from savings interest - how much can I get tax free? £18,570 or £12,570?

EthicsGradient

KovaK said:

NedS said:

KovaK said:

NedS said:

And if you run out of tax free allowances, you can currently purchase low coupon UK gilts (e.g, TN25, 2 year maturity) at around 4.6% yield to maturity of which 0.25% is paid as a coupon (interest) and the remaining will be achieved as a capital gain at maturity, tax free. Anyone can purchase and hold these in a GIA for free, so a great option if you are likely to pay tax on savings income.

Thanks everyone, I WAS overthinking it!

Thanks NedS for this suggestion, I'll have to look into it as I've never bought a gilt before!
Do you have to do anything special on your tax return for a gilt or just specify the amount that 0.25% equates to, like any other savings income?

cheers!

I've never had to complete a tax return, but I would assume you would just declare the coupon payments as interest income, exactly the same as you would any other interest payments you may have received.

Basically, you are buying TN25 gilt for £90.60 today that will return you £100 face value at maturity on 31/1/2025. Between now and then, you would receive the 0.25% annual coupon (25p interest) payable in 6 monthly instalments. Most of your gain will come from the return of your £100 capital, which only cost you £90.60 to purchase. You do not need to pay any capital gains tax on the gain, as theoretically there is no gain and you are merely being returned the original £100 face value of the bond.

Thanks everyone for their replies. That really helped.
NedS, thanks for drawing my attention to gilts. I'll do a search for TN25 and go from there! 

Is there any 'risk' associated with gilts?

Why doesn't everyone buy them if ther is no CGT and interest is so low?

Seems a really good way to invest safely to minimise tax on interest!
Thanks for the heads up!

The only risk with gilts in general is if the British government decides not to pay its debts; it has gone 300 years without that, so it's pretty safe.Unless you think the new government might think that a good idea (Trump in the USA mused about refusing to pay government debts, but nothing came of it - Republicans and Conservatives still include enough actual conservatives, who would be appalled by the idea, that I think they'd be able to stop such a radical move).

People will buy that gilt if it does what they want it to - give them back their capital plus a bit extra (not subject to tax) after 2 years 3 months, with a trickle of taxable income before that. The effective rate of return is 4.52% - slightly below the 4.7% that is currently the highest rate from the MSE savings account lists for 2 years. There are also dealing costs to take into account. They also get the option of selling it before maturity, but what they could get for it isn't entirely predictable - it will depend on how interest rates vary, and again there would be dealing costs.

eskbanker

KovaK said:

Seems a really good way to invest safely to minimise tax on interest!

People often refer to trying to minimise tax on interest, but it's usually better to approach saving from the perspective of aiming to maximise net return, which isn't the same thing, in that 80% of a good rate will often be more suitable than 100% of a poor one.

Having said that, are you making use of tax wrappers such as ISAs and pensions?  In your OP you said that you're not "not on a pension" but I'm assuming that just means that you're not receiving one yet and that you could still contribute to one?

KovaK

eskbanker said:

KovaK said:

Seems a really good way to invest safely to minimise tax on interest!

People often refer to trying to minimise tax on interest, but it's usually better to approach saving from the perspective of aiming to maximise net return, which isn't the same thing, in that 80% of a good rate will often be more suitable than 100% of a poor one.

Having said that, are you making use of tax wrappers such as ISAs and pensions?  In your OP you said that you're not "not on a pension" but I'm assuming that just means that you're not receiving one yet and that you could still contribute to one?

Thanks for your reply. 

Yes, I absolutely understand that maximising overall net return is the main objective but the mention of gilts piqued my interest!
Downside seems to be low income until redemption, hence the low tax. But I get you need to look at yield and dealing costs. I haven't invested in the Stock Market for decades so what kind of dealing costs are we talking about on a £100K purchase?

I have a couple of small final salary pensions to take in 5 years so didn't see the point of going the defined contributions route and gross rates on ISAs seem no better than net rates on bonds. So I haven't maximised tax wrappers at all! 

Since interest rates have been so low the last 14 years, this was never an issue but if they keep increasing I was looking to minimise my tax burden!

Thanks for the suggestions.

libra10

Interesting thread.

Presuming that interest from ISAs is not considered within the tax limits?

EthicsGradient

libra10 said:

Interesting thread.

Presuming that interest from ISAs is not considered within the tax limits?

Correct - interest in ISAs is not counted by the taxman in any way.

Dazed_and_C0nfused

libra10 said:

Interesting thread.

Presuming that interest from ISAs is not considered within the tax limits?

Providing you stick to the ISA rules then interest from an ISA is exempt from tax.

ChilliBob

Indeed an interesting thread. My understanding of the total savings you could have was correct, which is good.

If you get say 5k of dividends in that same year (unwrapped) you will need to pay tax on 3k of them, 8.75% if you have no other earnings...? 

Does that interact with the total amount from savings? Ie is that total reduced by 3k to nearer 15k instead of 18k... Then if you had savings interest above the 15k it would be 20% tax on what's above. 

libra10

Thanks @EthicsGradient and @Dazed_and_C0nfused With interest rates currently increasing, it looks like saving in ISAs might be useful if you don't want the bother of filling in tax forms.

NedS

KovaK said:

NedS said:

KovaK said:

NedS said:

And if you run out of tax free allowances, you can currently purchase low coupon UK gilts (e.g, TN25, 2 year maturity) at around 4.6% yield to maturity of which 0.25% is paid as a coupon (interest) and the remaining will be achieved as a capital gain at maturity, tax free. Anyone can purchase and hold these in a GIA for free, so a great option if you are likely to pay tax on savings income.

Thanks everyone, I WAS overthinking it!

Thanks NedS for this suggestion, I'll have to look into it as I've never bought a gilt before!
Do you have to do anything special on your tax return for a gilt or just specify the amount that 0.25% equates to, like any other savings income?

cheers!

I've never had to complete a tax return, but I would assume you would just declare the coupon payments as interest income, exactly the same as you would any other interest payments you may have received.

Basically, you are buying TN25 gilt for £90.60 today that will return you £100 face value at maturity on 31/1/2025. Between now and then, you would receive the 0.25% annual coupon (25p interest) payable in 6 monthly instalments. Most of your gain will come from the return of your £100 capital, which only cost you £90.60 to purchase. You do not need to pay any capital gains tax on the gain, as theoretically there is no gain and you are merely being returned the original £100 face value of the bond.

Thanks everyone for their replies. That really helped.
NedS, thanks for drawing my attention to gilts. I'll do a search for TN25 and go from there! 

Is there any 'risk' associated with gilts?

Why doesn't everyone buy them if ther is no CGT and interest is so low?

Seems a really good way to invest safely to minimise tax on interest!
Thanks for the heads up!

Assuming you hold the gilt to maturity, the only risk is the government defaulting on it's debt and not paying you back your principal. That is hopefully extremely unlikely with a UK gilt and you'd probably have bigger issues if it did happen.

Until very recently, the return on gilts has been extremely low as interest rates have been near zero. So there are gilts available on the market now with very low coupons that will effectively give a capital return rather than an interest return. That would be different if the government issues gilts now at 5% coupon rates where all the return would be in taxable interest, and you could actually see a situation where coupon rates are above the running yield, effectively returning your own capital to you in taxable interest payments.

KovaK

NedS said:

KovaK said:

NedS said:

KovaK said:

NedS said:

And if you run out of tax free allowances, you can currently purchase low coupon UK gilts (e.g, TN25, 2 year maturity) at around 4.6% yield to maturity of which 0.25% is paid as a coupon (interest) and the remaining will be achieved as a capital gain at maturity, tax free. Anyone can purchase and hold these in a GIA for free, so a great option if you are likely to pay tax on savings income.

Thanks everyone, I WAS overthinking it!

Thanks NedS for this suggestion, I'll have to look into it as I've never bought a gilt before!
Do you have to do anything special on your tax return for a gilt or just specify the amount that 0.25% equates to, like any other savings income?

cheers!

I've never had to complete a tax return, but I would assume you would just declare the coupon payments as interest income, exactly the same as you would any other interest payments you may have received.

Basically, you are buying TN25 gilt for £90.60 today that will return you £100 face value at maturity on 31/1/2025. Between now and then, you would receive the 0.25% annual coupon (25p interest) payable in 6 monthly instalments. Most of your gain will come from the return of your £100 capital, which only cost you £90.60 to purchase. You do not need to pay any capital gains tax on the gain, as theoretically there is no gain and you are merely being returned the original £100 face value of the bond.

Thanks everyone for their replies. That really helped.
NedS, thanks for drawing my attention to gilts. I'll do a search for TN25 and go from there! 

Is there any 'risk' associated with gilts?

Why doesn't everyone buy them if ther is no CGT and interest is so low?

Seems a really good way to invest safely to minimise tax on interest!
Thanks for the heads up!

Assuming you hold the gilt to maturity, the only risk is the government defaulting on it's debt and not paying you back your principal. That is hopefully extremely unlikely with a UK gilt and you'd probably have bigger issues if it did happen.

Until very recently, the return on gilts has been extremely low as interest rates have been near zero. So there are gilts available on the market now with very low coupons that will effectively give a capital return rather than an interest return. That would be different if the government issues gilts now at 5% coupon rates where all the return would be in taxable interest, and you could actually see a situation where coupon rates are above the running yield, effectively returning your own capital to you in taxable interest payments.

Thanks again, NedS, for the explanation. Best for me to look at low coupon rates at the moment.