Avoiding tax on savings

meester

I have a large amount of savings (about £100k). My income however is low, so I am entitled to tax credits. You lose these at a rate of 37.1%. Add on 20% income tax on the savings (is there still a 10% rate???), and that works out at 57.1%.

So there's not much point in saving.

Does anyone have any suggestions for restructuring so I can get a yield as capital rather than income?

EDIT: Link to my related thread on tax credits http://forums.moneysavingexpert.com/showthread.html?t=738223

CannyJock

Married or anyone else let you use their tax-free allowances?

Apart from the savings route where you spread the money around other accounts so the money technically "isn't yours" (needs trust, has risks etc), there's not much that doesn't carry some risk.

You could for example put the lot into an endowment product as a lump sum - that way it disappears as savings. Yes, risk but no risk-free high-return option

If you're paying a mortgage, would it be worth clearing your mortgage, I've got an offset mortgage, my savings match the balance of my mortgage so I've effectively got a 0% mortgage and I make my mortgage repayments from my offset account so it's self-regulating. For me this works because it's tax efficient to avoid the 40% higher rate tax bracket and at the same time I've got a safety net of emergency funds if I ever need it.

Jonbvn

Do ISA's and Index Linked Certs fall outside of the tax-credit requirement?

merlinthehappypig

Jonbvn wrote: »

Do ISA's and Index Linked Certs fall outside of the tax-credit requirement?

Yes they do.

The HRMC website states that you do not need to declare i[FONT=Arial,Arial]ncome from certain tax-exempt investments, such as, Individual Savings Accounts (ISAs), Personal Equity Plans (PEPs) or non-taxable National Savings products so a large percentage of the £100000 could be placed in these, especially if the OP gets this year's ISA open quickly.[/FONT]
[FONT=Arial,Arial]

http://www.hmrc.gov.uk/leaflets/wtc2.pdf (Look at the section headed income and capital)

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Another option for the rest of the money would be to place it somewhere where the interest isn't paid until the investment matures. This simply delays the payment of interest so that it doesn't need to be declared in the intervening period, but the OP's circumstances might have changed by then.

In the short term We have managed to keep the annual income down by spreading the investments so that the interest doesn't all come in the same tax year, splitting the investment between an account which pays interest in the 2007/08 tax year and one that pays out in the 2008/09 tax year. We will have earned around £10000 interest this year, but half is paid in March 2007 and the rest in September 2008 so have £5000 extra income each year.

This can only be done in the short term though so it will catch up with you eventually.

Finally, there is an earnings limit over which you can go without affecting the amount of tax credit that you can get. If the OP is at the bottom end of this band, then not all the interest earned will affect the tax credits paid.

baldbloke_2

I was genuinely astonished to read that interest or the equivalent from tax-free savings does not count as income for Tax Credits. For Pension Credit - which I looked into for my mother - they assume an income based on the amount of capital you have and I had naively taken that as applying across the board.

£30k in index-linked certs. Even £30k in Premium Bonds - why not?! A cash isa this year and next. £30k as soon as the next index-linked certs come along (surely soon!!!) and you're away! I find this very strange - that a person with about £4k income from capital does not have to declare it for what is after all a means-tested beneit paid for from taxation - but if that's how it works then good luck to you.

As someone working 32 hours on a lowish wage but with reasonable savings myself you have really set my brain working overtime. I thank you for that. A very useful thread for many people I'm sure

deaglecat

meester wrote: »

I have a large amount of savings (about £100k). My income however is low, so I am entitled to tax credits. You lose these at a rate of 37.1%. Add on 20% income tax on the savings (is there still a 10% rate???), and that works out at 57.1%.

So there's not much point in saving.

Does anyone have any suggestions for restructuring so I can get a yield as capital rather than income?

I think that with some offshore savings accounts (e.g. Nationwide IOM) that you can elect to defer the interest - and then captialise it on request (at a time when your circumstances are more favourable).... if I am correct in this interpretation then it may be worth doing if you don't need access to the interest on an ongoing basis.

Deag

meester

merlinthehappypig wrote: »

Finally, there is an earnings limit over which you can go without affecting the amount of tax credit that you can get. If the OP is at the bottom end of this band, then not all the interest earned will affect the tax credits paid.

Actually, my situation is the opposite.

In the current tax year my family income is £6k salary for me, £5,220 for my wife, and £30k dividends each (Company Director).

As of next year, she can no longer claim the £30k dividend without paying 40% tax. So next year, with no dividends, we will just have £11,220 of income.

Our tax credit entitlement is:

WTC basic element £1800
WTC 30 hour element £735
WTC Couple element £1770
Child tax credit family element £545
Child tax credit baby addition £545
Child tax credit child element £2085
Child tax credit child element (second child) £2085

The tax credit threshold is up from next year, to £6,420, but so is the withdrawal rate, to 39%. (Just as an aside, to earn over minimum wage (£5.52) while on tax credits, you ned to earn £13.46 an hour, which is £24,500/year, so once you've qualified for your 30-hour allowance, there's not really much sense in going out to work unless you are on £25k+/year)

So we then have base benefits entitlement of

£735 + £1800 + £1770 + £545 + £545 + £2085 + £2085 = £9,565

And we have over-threshold income of £4,800, so we lose 39% of that = £1,872.

Leaving us with £7,693 of benefits. Which pretty nicely balances the tax increase Mr. Brown wanted to impose on us.

So we close down the Icesave account, to avoid paying effectively 49% tax (which works out as 3.09% interest, which is pathetic), and we stick £30k in the index-linked savings certificates, which pay 5.35% net atm.

Can we invest in both 3- and 5-year products? Do these count as different issues, so hence £15k each product?

And then I guess we can stick up to £60k in the premium bonds, which is almost instant access, in case we need the money. And obviously £14k already into the ISAs.

meester

meester wrote: »

Actually, my situation is the opposite.

Sorry, just to clarify, my point was our family income will DROP £60k next year.

I assume this will be ok from a benefits point of view.

It's a bit of a joke that income can rise by £25k without having any effect. That's £9,750 worth of benefits that you're not actually entitled to.

baldbloke_2

meester wrote: »

Actually, my situation is the opposite.

In the current tax year my family income is £6k salary for me, £5,220 for my wife, and £30k dividends each (Company Director).

As of next year, she can no longer claim the £30k dividend without paying 40% tax. So next year, with no dividends, we will just have £11,220 of income.

Our tax credit entitlement is:

WTC basic element £1800
WTC 30 hour element £735
WTC Couple element £1770
Child tax credit family element £545
Child tax credit baby addition £545
Child tax credit child element £2085
Child tax credit child element (second child) £2085

The tax credit threshold is up from next year, to £6,420, but so is the withdrawal rate, to 39%. (Just as an aside, to earn over minimum wage (£5.52) while on tax credits, you ned to earn £13.46 an hour, which is £24,500/year, so once you've qualified for your 30-hour allowance, there's not really much sense in going out to work unless you are on £25k+/year)

So we then have base benefits entitlement of

£735 + £1800 + £1770 + £545 + £545 + £2085 + £2085 = £9,565

And we have over-threshold income of £4,800, so we lose 39% of that = £1,872.

Leaving us with £7,693 of benefits. Which pretty nicely balances the tax increase Mr. Brown wanted to impose on us.

So we close down the Icesave account, to avoid paying effectively 49% tax (which works out as 3.09% interest, which is pathetic), and we stick £30k in the index-linked savings certificates, which pay 5.35% net atm.

Can we invest in both 3- and 5-year products? Do these count as different issues, so hence £15k each product?

And then I guess we can stick up to £60k in the premium bonds, which is almost instant access, in case we need the money. And obviously £14k already into the ISAs.

Yes both 3yr & 5yr for both of you - and there will be further issues over the coming months -and as you say PBs of £60k.
What an extraordinary situation.

Working Tax credit is paid for from taxes and this is a bit bizarre ... isn't it?

meester

baldbloke wrote: »

Yes both 3yr & 5yr for both of you - and there will be further issues over the coming months -and as you say PBs of £60k.
What an extraordinary situation.

Do I approve? You don't care and it's really none of my business - but working tax credit is paid for from taxes and this is a bit bizarre ... isn't it?

Everything is paid for from taxes. Tax credits are just another form of benefits. When I first heard about them I thought it was a tax rebate system, but you needn't pay any tax at all to get them. I think the reason they call them tax credits is to make it look like not just another form of benefits.

For whatever reason, the government opted to ignore savings. So wealthy people, such as myself, are quite entitled to claim them.

Whether or not it's moral is somewhat interesting, as far as I'm concerned, the whole welfare state creates a dependency culture, but that's the culture we have you are 'entitled to' and 'your rights are'. There are no real moral responsibilities or obligations in Britain today. So yep, wealthy people claiming benefits, why not?

baldbloke_2

meester wrote: »

Everything is paid for from taxes. Tax credits are just another form of benefits. When I first heard about them I thought it was a tax rebate system, but you needn't pay any tax at all to get them. I think the reason they call them tax credits is to make it look like not just another form of benefits.

For whatever reason, the government opted to ignore savings. So wealthy people, such as myself, are quite entitled to claim them.

Whether or not it's moral is somewhat interesting, as far as I'm concerned, the whole welfare state creates a dependency culture, but that's the culture we have you are 'entitled to' and 'your rights are'. There are no real moral responsibilities or obligations in Britain today. So yep, wealthy people claiming benefits, why not?

Sorry - I edited my post so that I didn't appear offensive in any way but you have dealt with my original point very fairly. I just had no idea this could happen - I work alongside people on £6 an hour with families who claim Working Tax Credit and we sort of joke how I am just above all that being single - sometimes my eyes are opened by the most unexpected things.
Again thanks for ignoring my unintended rudeness which just masked genuine surprise.
Good luck! Hell Why Not!