Higher rate income tax bracket and tax on savings

robaber

Hello

I recently moved, just, into the higher rate tax bracket.

I initially planned to voluntarily increase my monthly pension contributions, to bring me back into the basic rate tax bracket.

However, between my, employer and current voluntary contributions, I am adding around 23% of my gross salary to my pension. So maybe I should do something else with it, other than just add to my pension. 

I am interested in Dave Ramsey's 7 baby steps in America, as a pathway. 

So my next step, would be preparing for my Children's university and other costs. 

My wife has to cancel our marriage tax allowance, as I am now ineligible. She has also started paying tax, over £250. So seems double ineligible.

I also need to start paying child benefit charge, through a self assessment. 

Currently my and my wife's savings are separate. I have now realised that being in the higher tax rate, also means my personal savings allowance is halved to £500 a year. If I don't change how our savings are arranged, I will be over this.

I planned to move my savings to my wife. But this will bring her over her allowance.

I now plan to move my some of my savings into a cash ISA. 

Alternatively, my wife could open a cash ISA, and we could combine our savings there. I want her to have access to at least half of the savings, in case of emergency. Although we have wills and LPA. 

I hadn't realised moving into the higher rate tax bracket, would have so many knock on effects. 

Is there anything else I have missed? 

Any other suggestions?

Dazed_and_C0nfused

Given the three things you yourself have identified then additional pension contributions (by you) would potentially resolve some issues.

If you are "just"' into the higher rate bracket then you could move yourself back into it through additional contributions.

This would mean you remain eligible for Marriage Allowance (although your wife may have a different view on whether this is desirable any more!).

You could have a full £1,000 savings nil rate band (aka Personal Savings Allowance).

You could avoid paying back any Child Benefit.

And could get (a small of) higher rate tax relief.

As ever tax is all based on the facts so the exact benefit will depend on your total taxable income and how this is split between earnings, interest etc.

As long as she doesn't become a higher rate payer your wife will remain eligible for Marriage Allowance.  But there might not be any financial benefit from it.  If she is paying £252 or more in tax each year then it's usually pointless for you as a couple.

And don't forget your wife may be able to benefit from the savings starter rate band (0% tax rate).  Having a full Personal Allowance would help with this.

robaber

Thank you. 

My wife has had a pay increase and so if paying more then £252 a year. So it sounds like mortgage allowance, it is no longer helpful for us. 

Something else I am mindful of is that in a month or so, I will receive another pay increase. I can increase my pension contributions now, but will have to increase again in a few months time. At what point do stop putting into my pension, while I still have other financial goals? 23% 25% 30%?

Looking online, it seems I have to pay child benefit charge over £50,100 and higher rate tax bracket is £50,270. So I avoid the charge I would have to increase my pension slightly more again.

I guess I also have to weigh this against the reduced ISA saving rate, compared to a normal saving rate. 

eskbanker

robaber said:

I guess I also have to weigh this against the reduced ISA saving rate, compared to a normal saving rate. 

Very much this - there have been many similar threads from people focusing heavily on avoiding paying tax, but the most important thing will generally be to maximise net return, i.e. 80% of a decent rate is often better than 100% of a poor one.

Albermarle

I guess I also have to weigh this against the reduced ISA saving rate, compared to a normal saving rate

Yes you do, but worth noting that at this moment, cash ISA rates and non ISA rates are closer than usual.

Band7

What pension provision does your wife have? 

badger09

As others have said, don’t be totally blinkered by saving tax. 

It makes sense to use both your annual ISA allowances though. Perhaps consider S&S ISA for university costs, depending on the ages of your children. 

TiVo_Lad

As you're a higher rate tax payer (42% in Scotland and 40% in RoUK) the Net Return on a Cash ISA will most likely eclipse anything you can get from a normal savings account.

For example, the current Top of Table 1 Yr Fixed Bond is 4.82% (effective 2.8% in Scotland and 2.89% in RoUK after higher rate tax) compared to the Top of Table 1 Yr Fixed Cash ISA at 4.25%.

You obviously need to factor in the Personal Savings Allowances of both you and your partner, so it may be that a mix of taxable and tax-free savings will give you the optimum return.

robaber

Thank you. 

My wife works part time. We voluntarily make contributions (post tax) via monthly direct debit into her company person, to bring her up to 15% of her pre-tax income. 

I have moved some of our savings over to my wife's savings account, to try to fully use her allowance. 

The rest is in mine and I will put anything which will bring me over our allowance, in my new cash ISA. Fortunately, this rate, is actually above my current savings rate. 

Currently, the university savings are split. During the year it builds up in a savings account. 

Once a year half goes into a 1 year fixed saving account. 

I add the other half to their junior S&S ISA, into a target date fund, set just before university. Currently the cash is out performing the fund, but I know that could change. 

AndyW79

I'm also doing the same and had been paying taxes on normal savings accounts, now we will gradually move everything to ISAs (albeit with somewhat lower returns) but as @eskbanker is correctly stating net will be much better.

jimjames

Just to clarify your original thread title in case anyone else sees it. There is no tax on savings in the UK. There is possible tax on interest received on those savings depending on your situation.