Where is Everyong Hiding Money?

Newbie_John

Problem with not-ISA savings is that quite a lot of things count towards it - for example Nationwide bonuses - £150 this year, GIA etc 
Also the limit can drastically drop when you move with your salary above £50k, and it's not just from £1000 to £500 but the tax also doubles.

ISAs especially S&S come with so much choice - from very safe matching the typical interest rate on cash ISAs like to REIT investments where you can be like a landlord, various gilts, bonds, index trackers.. 

Wyndham

TractorFactor said:

So is it really the case that I can't have £40,000 sitting in a bank account at 2.5% (for example) doing nothing but waiting for me to spend it when I want to, without the tax man having a chunk or being charged to invest it?

I'm very new to this and still reading through the guides but helps if people explain it like I'm 5 sometimes.

Just to check your understanding here... you do realise that in a bank/savings account your capital is safe and it's the interest that is taxed, not the whole amount? The tax man (or woman!) doesn't take a chunk of your original savings.

So, if £40,000 in an account at 2.5%, then over a year it earns £1000. This is exactly the tax free savings amount for a basic rate tax payer, so you wouldn't actually pay any tax on it at all.

If you had double that, so £80,000 also at 2.5%, then over the year it earns £2000. For this £2000 you first take off the £1000 tax free savings amount to leave £1000 of taxable savings income. Assuming you are a basic rate taxpayer, you'd therefore pay £200 of this to HMRC. BUT, you'd still have £1800 that you didn't have 12 months before.

The difference with investing is that your original amount of money is not 'safe' and you could lose that to stock market flucuations. The flip side is that your overall returns will be higher over a long period of time.

You may already know all of this, but given how your question was phrased I wanted to make sure!

Kim_13

Wyndham said:

TractorFactor said:

So is it really the case that I can't have £40,000 sitting in a bank account at 2.5% (for example) doing nothing but waiting for me to spend it when I want to, without the tax man having a chunk or being charged to invest it?

I'm very new to this and still reading through the guides but helps if people explain it like I'm 5 sometimes.

Just to check your understanding here... you do realise that in a bank/savings account your capital is safe and it's the interest that is taxed, not the whole amount? The tax man (or woman!) doesn't take a chunk of your original savings.

So, if £40,000 in an account at 2.5%, then over a year it earns £1000. This is exactly the tax free savings amount for a basic rate tax payer, so you wouldn't actually pay any tax on it at all.

If you had double that, so £80,000 also at 2.5%, then over the year it earns £2000. For this £2000 you first take off the £1000 tax free savings amount to leave £1000 of taxable savings income. Assuming you are a basic rate taxpayer, you'd therefore pay £200 of this to HMRC. BUT, you'd still have £1800 that you didn't have 12 months before.

The difference with investing is that your original amount of money is not 'safe' and you could lose that to stock market flucuations. The flip side is that your overall returns will be higher over a long period of time.

You may already know all of this, but given how your question was phrased I wanted to make sure!

But difficult to recommend that someone should earn an extra £1,000 in taxable interest and give £200 of it to HMRC when cash savings usually lose to inflation and almost certainly do once the interest has been taxed. When an ISA allowance is available, a Cash ISA usually beats the after tax return unless the saver is using Regular Savers (which it doesn't sound like the poster is given the amount sitting in one place.)

PixelPound

Newbie_John said:

Problem with not-ISA savings is that quite a lot of things count towards it - for example Nationwide bonuses - £150 this year, GIA etc 
Also the limit can drastically drop when you move with your salary above £50k, and it's not just from £1000 to £500 but the tax also doubles.

ISAs especially S&S come with so much choice - from very safe matching the typical interest rate on cash ISAs like to REIT investments where you can be like a landlord, various gilts, bonds, index trackers.. 

I did not know that. There was me feeling confident, but got notice last week that I owe £11 in tax, so they are reducing my tax code from 1257L to 1255L, so wonder if it's those?

It is a frustration that ISA rates are not as good as the best easy access or reg savers, but I guess it's now a case of deciding whether prefer to not pay tax or if it's worth it for the rate.

Putting a few K in Tembo fixed ISA (as rate possibly go down once BoE announcement comes) as I've a few 7%+ reg savers that probably take me above, 4.3% tax free is same as 5.375% taxable for basic rate payers.

Eco_Miser

subjecttocontract said:

I came across this a few days ago :-

'' No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or his property as to enable the Inland Revenue to put the largest shovel in his stores. The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the Taxing Statutes for the purpose of depleting the Taxpayer's pocket. And the Taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue''
Lord Clyde 1929.

Unfortunately, various governments since then have enacted statutes that effectively mean arranging one's legal relations to one's business or one's property to minimise such depletions in ways not envisioned in legislation is no longer considered honest.

Wyndham

Kim_13 said:

Wyndham said:

TractorFactor said:

So is it really the case that I can't have £40,000 sitting in a bank account at 2.5% (for example) doing nothing but waiting for me to spend it when I want to, without the tax man having a chunk or being charged to invest it?

I'm very new to this and still reading through the guides but helps if people explain it like I'm 5 sometimes.

Just to check your understanding here... you do realise that in a bank/savings account your capital is safe and it's the interest that is taxed, not the whole amount? The tax man (or woman!) doesn't take a chunk of your original savings.

So, if £40,000 in an account at 2.5%, then over a year it earns £1000. This is exactly the tax free savings amount for a basic rate tax payer, so you wouldn't actually pay any tax on it at all.

If you had double that, so £80,000 also at 2.5%, then over the year it earns £2000. For this £2000 you first take off the £1000 tax free savings amount to leave £1000 of taxable savings income. Assuming you are a basic rate taxpayer, you'd therefore pay £200 of this to HMRC. BUT, you'd still have £1800 that you didn't have 12 months before.

The difference with investing is that your original amount of money is not 'safe' and you could lose that to stock market flucuations. The flip side is that your overall returns will be higher over a long period of time.

You may already know all of this, but given how your question was phrased I wanted to make sure!

But difficult to recommend that someone should earn an extra £1,000 in taxable interest and give £200 of it to HMRC when cash savings usually lose to inflation and almost certainly do once the interest has been taxed. When an ISA allowance is available, a Cash ISA usually beats the after tax return unless the saver is using Regular Savers (which it doesn't sound like the poster is given the amount sitting in one place.)

Completly agree - and ISA would be the way to go. But the original question was about savings and tax, and the OP asked for an explaination as if they were a 5 year old. So that's what I provided. Others on the thread have already explained ISAs, so hopefully the OP now has that message.

I was just trying to helpful!!