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I have a bone to pick with our tax system

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Say you in your mid 20s and have worked real hard at a job to earn £41,500 a year in taxable income.

this means, after your £5.5k personal income allowance, any income your earn additionally you pay 40% tax on (as your on £36k+ from then on).

Let's say you get a bonus of £3k. You then have to pay £1200 to the tax man. With your remaining £1800 you put into a savings account because you are trying save up a deposit for a house, and do not want to risk it by putting it into the markets. so your then paying 40% on the interest you receive. So net interest of at best 4%.

however, if you put it into the markets, you could use your capital gains allowance of £9k annually. So, would it be better to put this bonus into the markets and hope you make greater than 4% so you can use up your capital gains allowance?

say you were given a £50k bonus, would it again make sense to put this money into the markets, because if you were fortunate and made a 10% return on this, you'd make £5k you could then cash out, using up some of your capital gains tax allowance, and put back into savings if wanted, and then have £5k extra rather than the £2k you would have made earning 4% in savings?


many thanks if you can help.
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Comments

  • debbie42
    debbie42 Posts: 2,586 Forumite
    john_kane wrote: »
    With your remaining £1800 you put into a savings account because you are trying save up a deposit for a house, and do not want to risk it by putting it into the markets. so your then paying 40% on the interest you receive. So net interest of at best 4%.

    You'd be much better off putting the £1800 in an ISA and not paying any tax on it at all, with the example you quote, as you haven't mentioned them whatsoever.
    Debbie
  • dunstonh
    dunstonh Posts: 119,685 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    however, if you put it into the markets, you could use your capital gains allowance of £9k annually. So, would it be better to put this bonus into the markets and hope you make greater than 4% so you can use up your capital gains allowance?

    stockmarket investments have access to tax wrappers but lets ignore those for the moment. The capital gains would be subject to CGT potentially but the dividends would be included on your income for income tax purposes.
    say you were given a £50k bonus, would it again make sense to put this money into the markets, because if you were fortunate and made a 10% return on this,

    I would be aiming for double digits as a long term average but if you are talking about short term one off then you wouldnt consider it an option as you dont know if you will get +/- 40% in a given 12 month period. Not a good reason when you are just trying to save a little bit of tax.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • thanks for your thoughts. debbie sorry i didnt mention, assume ISAs have been maxed.
    I would be aiming for double digits as a long term average but if you are talking about short term one off then you wouldnt consider it an option as you dont know if you will get +/- 40% in a given 12 month period. Not a good reason when you are just trying to save a little bit of tax.

    the problem i think is that there are two option: 1 yielding just 4%, but the other being higher risk and higher expected returns, but maybe not worth it if the money is being saved up for a house deposit. just 4% is mindblowingly bad. i have my tax exams in 7 weeks time for my accountanc job, so hopefully ill learn some of this in better depth than i currently know it.

    its just frustrating not being able to afford a 1 bedroom house in a okay area of london but then having to start paying 40% tax.

    thanks again
  • The real questions are "Is income tax the fairest way to pay for everything we expect from the state" and "Is there a fairer way to raise money for the NHS, old age pensions, defence, etc, etc".

    I suspect most people would prefer income tax - with better paid people paying relatively more - than any other form of taxation (perhaps apart from VAT?). Nobody seems to like Council Tax, Fuel Duty or Inheritance Tax.
  • dunstonh
    dunstonh Posts: 119,685 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    the problem i think is that there are two option: 1 yielding just 4%, but the other being higher risk and higher expected returns, but maybe not worth it if the money is being saved up for a house deposit. just 4% is mindblowingly bad. i have my tax exams in 7 weeks time for my accountanc job, so hopefully ill learn some of this in better depth than i currently know it.

    A yield of 4% isnt the return. That is just the anticipated income that the investments within the fund (or the dividend if single company) is likely to be. The unit price (or share price) can still fluctuate. So, you could have a yield of 4% and a gain of 6%. The gain will be subject to capital gains and the yield subject to income tax.

    In the short term, the yield of 4% could still see a capital loss (as it has done over the last 12 months with most low and medium risk funds.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Hi
    Just a small point on your comment about income tax:

    "Say you in your mid 20s and have worked real hard at a job to earn £41,500 a year in taxable income.

    this means, after your £5.5k personal income allowance, any income your earn additionally you pay 40% tax on (as your on £36k+ from then on)."


    Im not an expert by any means but would you not only pay the 40% tax on the portion of your income that was over £36k (i.e. 0% on first £5.5k, 20% on next £30.5k and 40% on remaining £5.5k)?

    Please correct me if i have picked this up wrong somewhere.

    Lauren
  • The real questions are "Is income tax the fairest way to pay for everything we expect from the state" and "Is there a fairer way to raise money for the NHS, old age pensions, defence, etc, etc".

    our current taxation system has drifted so far away from the fundamental reasons. we should be paying tax on our activities which bear reasonable discomfort to others (e.g. fuel -> carbon emissions) and to pay for the welfare state only as insurance policies i.e. we all pay for health insurance via the NHS, or that if that we become unemployed. also to services we all need (firemen, police, defence).

    unemployment benefit is the biggest joke. tax money should be paid out to those who unexpected are made unemployment through no fault of their own, not to those who can be bothered to get a job.
    A yield of 4% isnt the return. That is just the anticipated income that the investments within the fund (or the dividend if single company) is likely to be. The unit price (or share price) can still fluctuate. So, you could have a yield of 4% and a gain of 6%. The gain will be subject to capital gains and the yield subject to income tax.

    In the short term, the yield of 4% could still see a capital loss (as it has done over the last 12 months with most low and medium risk funds.

    sorry my bad. i meant to mean that in my circumstances is investing in low risk low fee equity+bond funds more attractive given i could use up some of my capital allowance if i sold at year end, compared with putting it into savings and paying 40% income tax?
    Im not an expert by any means but would you not only pay the 40% tax on the portion of your income that was over £36k (i.e. 0% on first £5.5k, 20% on next £30.5k and 40% on remaining £5.5k)?

    yep, but id be making my investment decision based with money which would be paying 40% tax. i just really want to get some long term plans laid down.

    thanks for your replies and any further comments much appreciated.
  • purch
    purch Posts: 9,865 Forumite
    Say you in your mid 20s and have worked real hard at a job to earn £41,500 a year in taxable income

    Jeez...........and your complaining.

    When I was 24, I got my first decent bonus and had to pay 60% tax.....'Fatty' :eek: Lawson didn't reduce the top rate to 40% until 1988 !!!!

    Whilst I tend to agree with much of the 'rant', I should point out that the fact that you can't afford a 1 bedroom house in London has nothing to do with the taxation system, and everything to do with the lunatic fiscal and monetary policies of our Government and it's Central Bank poodles.

    Personally I always put the maximum allowable amount into my pension in order to minimise the amount 'grabbed' by HMRC, (fully intending to access at least some of it when I am 50, but of course now that the idiot Brown has raised that age to 55, I'm gonna have to wait a little longer to get my hands on my 'hard earned')
    'In nature, there are neither rewards nor punishments - there are Consequences.'
  • debbie42
    debbie42 Posts: 2,586 Forumite
    john_kane wrote: »
    yep, but id be making my investment decision based with money which would be paying 40% tax.

    You surely need to decide what your long term investment and savings strategies are to be first? Tax considerations such as using tax wrappers for cash ISAs are easy to judge. Deciding that your money would be working harder in a S&S ISA purely because the interest on such a capital might be attracting tax is not a valid assessment.

    To use an oft quoted phrase: "Don't allow the tax tail to wag the financial dog".
    Debbie
  • JimmyTheWig
    JimmyTheWig Posts: 12,199 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    The problem as I see it is that much of the savings interest is just keeping up with inflation.
    If inflation is at 3% and you earn 3% interest, you shouldn't have to pay any tax on that because what you have isn't going up in value. If inflation is at 3% and you earn interest at 6% then you are "winning" by 3% and I don't see the problem with being taxed (at 40% if that's your bracket) on the 3% that you are up by.

    Would probably all get too complicated, but that's how I think it should work.
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