Savings Allowance and soon to breach into 40% tax band

[stacker512]

Hello,

Due to some workplace news I discovered today, it appears that I am on the road to breaching into the 40% tax rate this tax year (and subsequent years). But only by a smallish amount.

I've some plans for the next 18 months that I was going to use HL Active Saving (unsheltered from tax), that I was hoping to stop contributing once this fills up at just under £20k, to get me annual interest of £1k (which would have been safe at 20% income tax band).

However, today's news has scuppered my plan.

Seeing two options (so far):
1. keep putting money in, and accept that above £500 of interest I will be paying 40% tax on
2. move enough money out of the Active Savings into something else so that I wont get taxed on that cash.

I've not used up all my ISA allowance this year so far (more than enough to move current funds into ISA), however this does mean opening a cash ISA and accepting the lower rates. Plus I'd rather just keep buying ITs with fresh money (which will deplete my current ISA allowance anyway).

So option 2 seems to be either ISA or NSI premium bonds? (while I'd rather put more into my SIPP, I'm actually trying to save the money for this 18 month time frame)

If I choose option 1, will I have to do Self Assessments from now on?

Has anyone got some words of wisdom for me about this? I think I see what I need to do, I just feel like I'd rather not do it.

[mc2fool]

2. move enough money out of the Active Savings into something else so that I wont get taxed on that cash.

Have you considered low coupon short term gilts? The thing with gilts is that while the coupon (interest) from them is taxed as normal interest (inc. in respects of the savings allowance), there is no capital gains tax on any capital uplift.

So, if you buy, e.g. TN25 0.250% 31-01-2025 at the current price of 95.59 you'll get a little more than 0.25% interest over the next year and a bit, on which you'll pay tax as per normal (inc. not at all if it's within the allowance) and when it matures on 31-Jan-25 you'll get back 100 with the 4.41 uplift being totally free of tax.

That gives a gross return of 4.67%, 4.57% net if you're in the 40% tax band. That might not sound so great in comparison to the top line savings accounts, but if you're out of allowance it's equivalent to putting the money into a savings a/c at 5.7% if you're a 20% taxpayer, 7.8% if you're an HRT.

And, unlike a 1 year fixed savings a/c, you can sell it at any time, and while the price you'll get until 31-Jan-25 is up to the market, it's going to be not far off from a straight line between 95.59 now and 100 then.

In depth discussion on short term gilts here: viewtopic.php?p=597837#p597837

List of currently available gilts and their parameters here: https://www.yieldgimp.com/gilt-yields

[richfool]

Marcus pay 4.75% (includes a bonus) on their Cash ISA's ( instant access). That is the same rate as on their normal (non-ISA) Instant Access accounts.

[NotSure]

Shawbrook easy access ISA is 4.7%, 1-year fixed is 5.01%. The gap between ISA and non-ISA savings seems to have closed significantly of late. ISAs are now much better option if paying 40% tax.

[kempiejon]

So option 2 seems to be either ISA or NSI premium bonds? (while I'd rather put more into my SIPP, I'm actually trying to save the money for this 18 month time frame)

I moved savings into premium bonds and a couple of 12 month fixed rate accounts maturing next tax year to keep below the tax threshold. In your instance you should fill your current ISA allowance and I'd just keep buying ITs if that's your plan. Accumulating more cash into PBs. Mc2fool's suggestion of short gilts is a bit of a learning curve but a very neat solution. I'd rather be out of the admin of extra taxes. A few year ago, due to the reduction of allowances, I couldn't get all my dividends sheltered in time. I was able to settle my first bill without a tax return, the following year an adjustment to my tax code. I have everything sheltered now. I generally try to fill up early in the tax year.

[uspaul666]

Maybe salary sacrifice?

[kempiejon]

Maybe salary sacrifice?

That was a thought but the OP said didn't want to add to SIPP and was accumulating cash for 18 months - presumably a spending event is due.
Adding the pay rise to SIPP via SS is worth considering.

[monabri]

I was thinking along the same lines as mc2fool.

[mutantpoodle]

2. move enough money out of the Active Savings into something else so that I wont get taxed on that cash.

Have you considered low coupon short term gilts? The thing with gilts is that while the coupon (interest) from them is taxed as normal interest (inc. in respects of the savings allowance), there is no capital gains tax on any capital uplift.

So, if you buy, e.g. TN25 0.250% 31-01-2025 at the current price of 95.59 you'll get a little more than 0.25% interest over the next year and a bit, on which you'll pay tax as per normal (inc. not at all if it's within the allowance) and when it matures on 31-Jan-25 you'll get back 100 with the 4.41 uplift being totally free of tax.

That gives a gross return of 4.67%, 4.57% net if you're in the 40% tax band. That might not sound so great in comparison to the top line savings accounts, but if you're out of allowance it's equivalent to putting the money into a savings a/c at 5.7% if you're a 20% taxpayer, 7.8% if you're an HRT.

And, unlike a 1 year fixed savings a/c, you can sell it at any time, and while the price you'll get until 31-Jan-25 is up to the market, it's going to be not far off from a straight line between 95.59 now and 100 then.

********

do you have to complete CGT pages on tax return iro these gilts??

[mc2fool]

do you have to complete CGT pages on tax return iro these gilts??

No.

"profits or losses made on the disposal of gilts (including on redemption) by individual investors are not taxable and do not have to be included on the investor’s tax return, either as income or capital gains."

https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/taxation/

[Steveam]

Doing a tax return is really not onerous if you keep good records.

Best wishes, Steve

[the0ni0nking]

Doing a tax return is really not onerous if you keep good records.

Best wishes, Steve

Appreciate this is going slightly off topic compared with the initial post (but the gilts suggestion is something that interests me and will prompt me to do some further research/reading as I'm a higher rate taxpayer, will exceed the higher rate interest tax free amount every year so long as rates remain >1% on savings and am not really in a position to tax shelter investments given my relatively short term plan [<3 years] to move overseas).

I can understand the mentality of trying to avoid self-assessment if you can - after all, am sure in the next few days as the deadline approaches we'll hear some negative newsflow about either the HMRC help line, the website etc etc.

But as Steveam has said, self-assessment can be and I think is pretty straight forward for the overwhelming majority of people impacted by it. I think I've been doing SA for around 15 years now - initially due to property income but now extended to property, shares/investment income, interest and foreign income. If you keep your records neat and tidy and keep on top of them then the actual form completion I've found to be pretty straightforward. I also try and get it out of the way as soon as I can after the end of the tax year - so in the case of this year I submitted in June-23. Submitting early doesn't mean that you have to pay early.

I probably spend more time submitting my quarterly and annual return to Agencia Tributaria in Spain than I do on my UK return despite the fact my UK return includes the details of my Spanish return on the foreign income side of things. Imagine the uproar if the UK govt made tax returns quarterly with payments due within 21 days of the quarter end!

[stacker512]

But as Steveam has said, self-assessment can be and I think is pretty straight forward for the overwhelming majority of people impacted by it

But it's such a pain:
- there is no software that I know of to do electronic one on my sort of computer
- you are forced to keep records, altogether
- you are forced to keep records for 6 or so years
- you have additional deadlines now, compared to having no deadlines via PAYE
- there are (legal) penalties if you get any of the details wrong

[stacker512]

Had a look at the Interest section of the Active Savings, and looks like I was hot and bothered about the future interest - current records indicate that my past interest for this tax year is £288 (because I switched into higher interest savings towards the end of last year), and with only 3 months left (when the interest is paid), I should be fine (assuming no interest rate rises) for this current Tax year.

Next tax year is a different story, but given that some of these savings are needed earlier than 18 months for an event that will need payments to be made from the savings at ad-hoc times, I will still likely need to move some of this into a cash isa or something.

I don't understand gilts well enough to invest in them, even though the very basic concept is easy to understand.
The question then becomes, should I store my emergency fund in a cash isa, or in premium bonds?

[mc2fool]

I don't understand gilts well enough to invest in them, even though the very basic concept is easy to understand.

If your intent is to hold them to maturity then the basic concept (and the appropriate terminology) is pretty much all you need and there's a lot (perhaps too much!) of info at the previously linked-to thread. You'll know exactly what the results will be from the moment you buy them.

(OTOH if you're planning on becoming a gilt trader then it's another story ... )

Who's your stockbroker?

[Gerry557]

Doing a tax return is really not onerous if you keep good records.

Best wishes, Steve

It doesn't matter what records you keep if you are being told that there are 13 months in a year and simple arithmetic can't be done by the tax man.

That took a couple of years of back and forward to get to the final figure of 19p that I owed.

Sorry if I'm cynical

[kempiejon]

I don't understand gilts well enough to invest in them, even though the very basic concept is easy to understand.
The question then becomes, should I store my emergency fund in a cash isa, or in premium bonds?

It's the payment of tax or rather avoiding it that is the complication, when interest rates were miserly, or savings was taxed at source or if there was a more useful allowance this is all a non problem. Don't fear the tax return though. If you don’t usually complete a personal tax return, you may find that your tax code changes because your bank will notify HM Revenue & Customs (HMRC) of any interest received. HMRC will, in turn, complete any necessary calculations and changes. Of course if you don't have to do a tax return why would you want to and staying within limits helps. At 40% shouldn't you be claiming back pension contribution tax relief too?

If you're going to use the cash in a year or so and have an intention to use your ISA allowance for long term sheltering of shares ITs etc then to me premium bonds must be the winner? Invisible for tax purposes, no fees and easy admin.
Gilts a little more work to do but not onerous and I think a worthwhile bit of knowledge to have. Certainly it's a string to investing I previously didn't understand now I've had cause to investigate but I'm pleased I did. The idea of putting a known amount of money aside until a set date in the future with a known (even inflation linked) return is attractive.

[Lootman]

I don't understand gilts well enough to invest in them, even though the very basic concept is easy to understand.
The question then becomes, should I store my emergency fund in a cash isa, or in premium bonds?

It's the payment of tax or rather avoiding it that is the complication, when interest rates were miserly, or savings was taxed at source or if there was a more useful allowance this is all a non problem. Don't fear the tax return though. If you don’t usually complete a personal tax return, you may find that your tax code changes because your bank will notify HM Revenue & Customs (HMRC) of any interest received. HMRC will, in turn, complete any necessary calculations and changes. Of course if you don't have to do a tax return why would you want to and staying within limits helps. At 40% shouldn't you be claiming back pension contribution tax relief too?

Bear in mind that lots of people do not have a tax code. If you no longer work and are deferring occupational pensions, then you will likely not have one. The receipt of interest from a bank alone does not invoke a tax code.

I have not had a tax code for about 25 years, and do not want one!

[Steveam]

But as Steveam has said, self-assessment can be and I think is pretty straight forward for the overwhelming majority of people impacted by it

But it's such a pain:
- there is no software that I know of to do electronic one on my sort of computer
- you are forced to keep records, altogether
- you are forced to keep records for 6 or so years
- you have additional deadlines now, compared to having no deadlines via PAYE
- there are (legal) penalties if you get any of the details wrong

Whether or not you are doing a tax return you are “required” to keep records and there are penalties if you get things wrong. In fact submitting a correct tax return puts the onus on HMRC.
Put simply - you want to be doing so well that you have to pay tax. If you have a visceral dislike of paying taxes then become poor or do lots of manoeuvring (but be sure to keep good records in case HMRC decide to check).

Best wishes, Steve

[XFool]

Doing a tax return is really not onerous if you keep good records.

Best wishes, Steve

It doesn't matter what records you keep if you are being told that there are 13 months in a year and simple arithmetic can't be done by the tax man.

Finally sorted!

viewtopic.php?p=636542#p636542