Minimising tax on dividends and savings interest

C_Mababejive

Hi all,

This year i will be in the higher tax bracket without a doubt. Thats where i was last year also.

I have dividends and savings interest all exceeding the allowances.

I'm just considering my options;

Maximise ISA

Then invest a chunk of the savings into investments instead ? Obviously dividend tax is lower than savings interest tax and i could also potentially contribute to my pension to bring me below the higher rate threshold.

The question is, what to buy?

CTY is an old favourite of mine but it is riding high at the moment

What other investment vehicles could i buy that are not individual shares and that pay a decent dividend ? Im thinking investment trusts and funds that pay divis.

Maybe save a chunk of money in foxed bonds for more than a year as im close to potentially retiring so the interest would be payable when im in the 20% band and not the higher ?

Thanks all

GeoffTF

If you want to minimise tax "a decent dividend" is the last thing you want. Vanguard Developed World ex UK has a low dividend.

ColdIron

Pension, ISA and premium bonds are the obvious targets

As a higher rate taxpayer, pension is a no brainer for many. It can restore many of the 'allowances', very generous tax relief and provision for later life without an earned income. Tax relief now at 40% and maybe 20% later (25% tax free)

C_Mababejive said:

What other investment vehicles could i buy that are not individual shares and that pay a decent dividend ? Im thinking investment trusts and funds that pay divis.

Outside of tax shelters (pension/ISA) 33.75% is better than 40% but not by much. Instead of focussing on dividends how about taking advantage of the capital gains annual exempt amount (£6,000 currently, £3,000 next year) and looking at low dividend/higher gain investments? This gives you another 'allowance' and you have much more control of when you are liable for tax, you can push it forward to a time that suits you

You are probably using all of the £1,000 dividend 'allowance' now and the £500 next year isn't worth a damn

as im close to potentially retiring

Pension does seem to be standing on the rooftop shouting 'over here, over here'

It would be at the top of my list

Doctor_Who

What other investment vehicles could i buy that are not individual shares and that pay a decent dividend ? Im thinking investment trusts and funds that pay divis.

I completely agree with ColdIron above, pension contributions are the obvious choice. I was in a similar situation 5 or so years ago, but had maxed both my ISA and pension contributions (£40K AA). My next step was VCTs - these are much higher risk than other investments, but have the benefit of 30% tax relief upfront (must be held for 5 years to retain this) and dividends are free of tax.

You asked for suggestions and VCTs are a possibility once you've exhausted your other tax allowances. I will say it again, VCTs are considered high risk and are not suitable for most people, but for HR tax payers who have used their other tax allowances they may be an option (please do your own due diligence).

ChilliBob

Don't let the tax tail wag the investment dog. If this is cash you'd have kept in savings if it were not for tax then you'll obviously be exposing yourself to more risk by investing it on equities. So, make sure you're comfortable with that and how it fits into the rest of your portfolio. 

Gilts are an alternative option, if held to Maturity and chosen carefully you can basically get a tax free capital gain and only pay tax on a small coupon. 

The investing into something like equities, or gilts rod that matter, assumes you've exhausted any tax shelters, which it sounds like you haven't just yet  

C_Mababejive

Hi all, thanks , i currently pay into a SIPP to address my higher rate tax band very year. 

EDIT ,, im also thinking that money paid into pensions is locked into paying basic rate tax when you take it out although there is of course the sweetener of the TFLS ,,,

C_Mababejive

ColdIron said:

Pension, ISA and premium bonds are the obvious targets

As a higher rate taxpayer, pension is a no brainer for many. It can restore many of the 'allowances', very generous tax relief and provision for later life without an earned income. Tax relief now at 40% and maybe 20% later (25% tax free)

C_Mababejive said:

What other investment vehicles could i buy that are not individual shares and that pay a decent dividend ? Im thinking investment trusts and funds that pay divis.

Outside of tax shelters (pension/ISA) 33.75% is better than 40% but not by much. Instead of focussing on dividends how about taking advantage of the capital gains annual exempt amount (£6,000 currently, £3,000 next year) and looking at low dividend/higher gain investments? This gives you another 'allowance' and you have much more control of when you are liable for tax, you can push it forward to a time that suits you

You are probably using all of the £1,000 dividend 'allowance' now and the £500 next year isn't worth a damn

as im close to potentially retiring

Pension does seem to be standing on the rooftop shouting 'over here, over here'

It would be at the top of my list

ColdIron said:

Pension, ISA and premium bonds are the obvious targets

As a higher rate taxpayer, pension is a no brainer for many. It can restore many of the 'allowances', very generous tax relief and provision for later life without an earned income. Tax relief now at 40% and maybe 20% later (25% tax free)

C_Mababejive said:

What other investment vehicles could i buy that are not individual shares and that pay a decent dividend ? Im thinking investment trusts and funds that pay divis.

Outside of tax shelters (pension/ISA) 33.75% is better than 40% but not by much. Instead of focussing on dividends how about taking advantage of the capital gains annual exempt amount (£6,000 currently, £3,000 next year) and looking at low dividend/higher gain investments? This gives you another 'allowance' and you have much more control of when you are liable for tax, you can push it forward to a time that suits you

You are probably using all of the £1,000 dividend 'allowance' now and the £500 next year isn't worth a damn

as im close to potentially retiring

Pension does seem to be standing on the rooftop shouting 'over here, over here'

It would be at the top of my list

"low dividend/higher gains investments "? 

I dont want to buy individual shares at this point . 

Could HSBC FTSE all world fund be an example of the above? It turns around 8-10% pa. 

Other suggestions welcome


Also i understand that monies in pensions are not subject to IHT save for the age 75 rules ?