Tax on interest/income from investment account

Saffagal

Hi, I have done a lot of reading and want to be sure that I understand this correctly. I have recently come into an inheritance (approx 100k) after my mom passed away.

I plan to invest this as 20k in a cash ISA, 15k in a 1yr fix (to transfer into an ISA in the new tax year), 10k in a 6month fix (5k to then go into new ISA, 5k for home improvement), 20k in a 90day notice account, 20k in high interest instant access acc and 10k in a smart investor investment acc. 

I understand that I will be liable to pay tax on savings interest (I'm a basic rate tax payer) as my allowance on savings interest is 1k and I will be over this threshold. 

However, from what I have read, I believe I can earn £500 from investment (shares/dividends) before being liable for tax on the investment acc; is my understanding on this correct? 

anniecave

Yes, £500 tax free allowance on investments as per https://www.moneyhelper.org.uk/en/savings/types-of-savings/tax-on-savings-and-investments and 8.75% dividend tax on income above at basic rate (assuming total of all your income less allowances are still within basic rate)

InvesterJones

Saffagal said:

However, from what I have read, I believe I can earn £500 from investment (shares/dividends) before being liable for tax on the investment acc; is my understanding on this correct? 

You can earn £500 a year in dividends from equities, yes. When you sell these investments you may also have to pay capital gains tax if you've gained more than the allowance (currently £3000).

Dazed_and_C0nfused

Saffagal said:

Hi, I have done a lot of reading and want to be sure that I understand this correctly. I have recently come into an inheritance (approx 100k) after my mom passed away.

I plan to invest this as 20k in a cash ISA, 15k in a 1yr fix (to transfer into an ISA in the new tax year), 10k in a 6month fix (5k to then go into new ISA, 5k for home improvement), 20k in a 90day notice account, 20k in high interest instant access acc and 10k in a smart investor investment acc. 

I understand that I will be liable to pay tax on savings interest (I'm a basic rate tax payer) as my allowance on savings interest is 1k and I will be over this threshold. 

However, from what I have read, I believe I can earn £500 from investment (shares/dividends) before being liable for tax on the investment acc; is my understanding on this correct? 

Pretty much yes.

The first £1,000 of taxable interest will be taxed at 0%.

The first £500 of dividend income will be taxed at 5%.

If you don't pay much basic rate tax you may have some of the savings starter rate band also available.  But if you earn above £17,570 in taxable earnings/pension income that won't be relevant for you.

Saffagal

Thank you, I earn approx 25k so my savings allowance will be 1k and my forecast of income plus savings interest is still within the basic tax rate. 

I understand I will be liable for capital gains if I liquidate the investment acc but am looking at this being a long term investment with the potential to increase the investment in the future to potentially provide some additional income in 10-15 yrs time

EthicsGradient

Dazed_and_C0nfused said:

Saffagal said:

Hi, I have done a lot of reading and want to be sure that I understand this correctly. I have recently come into an inheritance (approx 100k) after my mom passed away.

I plan to invest this as 20k in a cash ISA, 15k in a 1yr fix (to transfer into an ISA in the new tax year), 10k in a 6month fix (5k to then go into new ISA, 5k for home improvement), 20k in a 90day notice account, 20k in high interest instant access acc and 10k in a smart investor investment acc. 

I understand that I will be liable to pay tax on savings interest (I'm a basic rate tax payer) as my allowance on savings interest is 1k and I will be over this threshold. 

However, from what I have read, I believe I can earn £500 from investment (shares/dividends) before being liable for tax on the investment acc; is my understanding on this correct? 

Pretty much yes.

The first £1,000 of taxable interest will be taxed at 0%.

The first £500 of dividend income will be taxed at 5%.

If you don't pay much basic rate tax you may have some of the savings starter rate band also available.  But if you earn above £17,570 in taxable earnings/pension income that won't be relevant for you.

"5%"? A typo, I presume, though '5' is rarely near '0' on a keyboard or number pad.

MX5huggy

What is this “investment acc” you are proposing to use? That term covers a multitude of products. 

If you are going to invest in stocks and shares (and if you have an investment term of 10 years plus then you should be). Probably better to use your ISA allowance for this than a Cash ISA, it makes tax simple (there’s none). Invest in funds maybe tracker funds. 

Dazed_and_C0nfused

EthicsGradient said:

Dazed_and_C0nfused said:

Saffagal said:

Hi, I have done a lot of reading and want to be sure that I understand this correctly. I have recently come into an inheritance (approx 100k) after my mom passed away.

I plan to invest this as 20k in a cash ISA, 15k in a 1yr fix (to transfer into an ISA in the new tax year), 10k in a 6month fix (5k to then go into new ISA, 5k for home improvement), 20k in a 90day notice account, 20k in high interest instant access acc and 10k in a smart investor investment acc. 

I understand that I will be liable to pay tax on savings interest (I'm a basic rate tax payer) as my allowance on savings interest is 1k and I will be over this threshold. 

However, from what I have read, I believe I can earn £500 from investment (shares/dividends) before being liable for tax on the investment acc; is my understanding on this correct? 

Pretty much yes.

The first £1,000 of taxable interest will be taxed at 0%.

The first £500 of dividend income will be taxed at 5%.

If you don't pay much basic rate tax you may have some of the savings starter rate band also available.  But if you earn above £17,570 in taxable earnings/pension income that won't be relevant for you.

"5%"? A typo, I presume, though '5' is rarely near '0' on a keyboard or number pad.

Yes, careless 😭

wmb194

Bear in mind that whilst income from 'investments' is often in the form of dividends it can also be interest and property income distributions. It depends on what you're investing in. If you receive interest then it will count towards the same 0% interest allowance as interest from savings accounts.

Saffagal

Thank you, the investment acc I am considering is a barclays smart investor acc - their balanced approach - as I don't have the knowledge or confidence to invest using a non managed account. 

But I take the point that especially with my lack of knowledge in this area, and to simplify things, it would be better to use my ISA allowance this year for a stocks and shares ISA rather than opening an investment acc outside of my ISA allowance. 

I didn't realise that if you some income from investments could count as part of your savings allowance. 

Thank you for taking the time to comment, I will revise my plan and rather open a stocks and shares ISA than a cash one and investment acc. I will increase what I place in a notice account until the new tax year and a further ISA subscription 

Keep_pedalling

Do you have any short / medium term plans for this money? Putting some of it in investments is high risk if you plan to use it for a major purchase in a few years. The small amount of tax you might save could be far outweighed by a loss in value of the investment.