Premium bonds or savings accounts first

CaptainWales

Hi. I am a higher rate tax payer and have some savings available - would it be better to open savings accounts first (so get interest but have to pay tax) or would it be better to open and max out premium bonds before opening savings accounts? i.e max out premium bonds first which are tax free.   

Swipe

Pension, then ISA, then premium bonds

boingy

CaptainWales said:

Hi. I am a higher rate tax payer and have some savings available - would it be better to open savings accounts first (so get interest but have to pay tax) or
would it be better to open and max out premium bonds before opening savings accounts? i.e max out premium bonds first which are tax free.   

Pension is the best thing a higher rate tax payer can do with spare money but only if you are sure you won't need the money until you are 55, or whatever the minimum age is for you.

You can earn £500 in savings interest before you pay any tax on it and you get better rates outside of an ISA so do consider that. 

Premium Bonds tend to be a bit of an emotive subject around these parts, not sure why, but they are definitely worth considering as a higher rate tax payer. I'll let someone else chime in with the numbers for average/median luck...

Even though an ISA may pay less than the equivalent normal savings account it's worth remembering that anything you put in an ISA this tax year stays tax free forever and you can transfer ISAs to a newer ISA and keep the tax free status so over the longer term you can build up quite a pot of tax free savings.

Finally, if you have a spouse and they are not a higher rate tax payer then you could consider moving some money into their name to take advantage of their allowances and lower tax rate.

CaptainWales

Thanks. ISA allowance already used and not that keen tying money up in pension until 55. 

What is the most i can earn gross per month to bring me into 20% tax band? 

Dazed_and_C0nfused

If there are no Gift Aid or RAS pension contributions to factor in and you aren't Scottish resident for tax purposes then the basic rate threshold is currently £50,270.

Consisting of the Personal Allowance of £12,570 and basic rate band of £37,700.

CaptainWales

So £50,270 divide 12?

MX5huggy

CaptainWales said:

So £50,270 divide 12?

Yes so £4189 per month before you would pay 40% Income tax, but NI drops to 2% from 12% at the same point. If you’ve got kids then the High income Child Benefit charge kicks in at £50k. Income tax of course is not worked out monthly but in total income in the year. 

You could use you dividend allowance and Capital Gain Tax allowance to have a General Investment Account running tax free. 

CaptainWales

Thanks.

The interest i earn over £500, would that be taxed at 40%? 

Doctor_Who

CaptainWales said:

Thanks.

The interest i earn over £500, would that be taxed at 40%? 

Yes, if you are a HR tax payer. £500 taxed @ 0%, anything above £500 taxed @ 40%. Which? has an article explaining tax on interest:

https://www.which.co.uk/money/tax/income-tax/income-tax-on-savings-and-investments/tax-on-savings-aC76e6j35O1H

El_Torro

Premium Bonds currently have an annual prize fund rate of 4%. You may get a 4% return on your money in Premium Bonds, you might get less, you might get more. Bear in mind that the more you have in Premium Bonds (up to the maximum allowance of £50k per person) the more likely you are to get the advertised 4% return. The less you have in Premium Bonds the more erratic your return will be. If you have £1,000 in there for example then the likelihood of winning nothing over the course of a year is high. 

If you assume you will get a return of 4% then to beat this in non ISA savings accounts you will need to earn at least 6.67% interest. I don't see many easy access savings accounts offering this kind of return. Even many fixed term savings accounts and regular savers are not offering this kind of return. 

Remember that you can earn up to £500 interest a year without paying tax on it. So you might want a combination of savings accounts and Premium Bonds.

Ultimately the return on Premium Bonds is not guaranteed. So at least part of the question is: Are you feeling lucky?

Tigerpilot

Premium Bonds now at 4.64. 👍🤠