Taxing times

Dominic Thomas
Jan 2024  •  5 min read

Taxing times

Tax is perhaps one of the most divisive issues.  At the time of writing, just before the Christmas break 2023, the Scottish Government has announced that it is imposing the additional rate of income tax (45%) at a much lower level.  Unlike England and Wales, the Additional Rate will start at £75,000.

Here in England and Wales, the 45% rate starts at that “only a quango could come up with it” number of £125,140 for tax year 2023/24.  So someone earning more than £125,140 pays 45% income tax, but in Scotland the line is drawn much sooner.

By comparison, a Scottish resident earning £125,140 will pay an extra £2,507 on the same income. I doubt that the extra tax is enough to prompt thoughts about moving south, but it may well alter behaviour at the ballot box.

As a reminder, the tax rates for this tax year (2023/24) which comes to a close on 5th April 2024 are as follows:

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571-£50,270 20%
Higher Rate £50,271-£125,140 40%
Additional Rate Over £125,140 45%

These are the income tax rates on earned income, not dividends (which have lower tax rates).

If you are breathing a sigh of relief because you live in England or Wales, remember that this tax year saw the Government reduce the higher rate band so that Additional Rate begins at £125,140 rather than £150,000.

Most of us have been impacted by inflation, yet the personal allowance remained frozen as did the basic rate tax band. So more people pay more income tax. This is what the media and whoever is in opposition, like to call “stealth taxes” basically an increase in tax in real terms.

Additional Rate tax was introduced in the tax year 2010-11, and saw 236,000 people pay 45% raising £34.5billion. Ten years later, the HMRC 2020-21 data saw this number increase to 481,000. There is no doubt that whichever way one observes the data produced by HMRC, we all pay more tax.

There are of course some things that you can do about reducing tax or even obtaining tax reliefs, these are all part of a good financial plan. However what I often observe is how little attention is paid to good arrangement of financial ‘stuff’ so that you can minimise tax payments. How much and where from become really important when drawing money from your portfolio. It’s one thing to get tax relief or use an allowance, it’s another to draw money out so that you pay less than 20% tax.

I recently produced a White Paper that you may find of interest called ‘Understanding Adviser Fees’, which includes and explanation about the value that we bring. Whilst I firmly believe that every little helps, if you focus purely on costs and ignore taxes, you will quickly wonder why you bothered. You can find the paper (which is designed to be readable – feedback welcome) here.

Taxing times2024-02-01T09:21:01+00:00

Taxing your savings

Dominic Thomas
Feb 2023  •  10 min read

Prize – Back to winning ways? Or simply more tax on your savings?

Despite the cold weather and general sense of grey, there are some silver linings. On 24th January 2023 NS&I increased the interest rates on various accounts.

If you are one of the 870,000 or so people who hold NS&I’s Direct Saver, Income Bonds or Direct Cash ISA, you will now get a little more interest. The interest rate paid on Direct Saver and Income Bonds will increase from 2.30% to 2.60%, whilst the interest rate on Direct ISA will increase from 1.75% tax-free to 2.15% tax-free.

Those of you who like Premium Bonds and remain optimistic of jackpot winnings (less likely than being struck by lightning), the prize fund rate will also increase from 3.00% to 3.15%, effective from the February 2023 prize draw. This follows the rate increasing from 2.20% to 3.00% on New Year’s Day.

NS&I has also increased the interest rate that it pays on its Junior Cash ISA from 2.70% tax-free to 3.40% tax-free, meaning that 80,000 under 18s will benefit from extra interest on their savings, though why anyone would want to hold cash for 18 years is beyond me …

Media spin means that we can confidently say that “today’s changes mean that Income Bonds are now paying their highest rate of interest since 2008” which is of course since the infamous credit crunch.  The prize fund on premium bonds is also at its highest level since the great crunch.

The odds of each £1 Bond winning any prize will remain fixed at 24,000 to 1, with the changes meaning that the number of prizes worth £50 to £100,000 will increase from next month’s draw (February 2023). In short, if you have at least £24,000 in Premium Bonds you would be unlucky not to win at least £25 (the smallest but most common prize, paid out on over 2.6m Premium Bonds).

There are an estimated 119 billion premium bonds in issuance. The £1m jackpot is paid out on two bonds every month. So there is roughly a 1 in 59 billion chance of winning the jackpot in any month. It will not surprise you that I don’t believe that reliance on such odds is a good strategy for your future, but I certainly would acknowledge that it’s a little bit of fun.

Current and new Premium Bonds prize fund rate and odds:

Current prize fund rate Current odds New prize fund rate (from February 2023) Odds from February 2023 (no change)
3.00% tax-free 24,000 to 1 3.15% tax-free 24,000 to 1

Number and value of Premium Bonds prizes:

Value of prizes in January 2023 Number of prizes in January 2023 Value of prizes in February 2023 (estimated) Number of prizes in February 2023 (estimated)
£1,000,000 2 £1,000,000 2
£100,000 56 £100,000 59
£50,000 111 £50,000 117
£25,000 224 £25,000 236
£10,000 559 £10,000 590
£5,000 1,116 £5,000 1,177
£1,000 11,968 £1,000 12,573
£500 35,904 £500 37,719
£100 1,159,432 £100 1,280,509
£50 1,159,432 £50 1,280,509
£25 2,617,902 £25 2,376,161
Total

£299,202,350

Total

4,986,706

Total

£314,347,875

Total

4,989,652

Variable rate savings products:

Product Previous interest rate Interest rate from today (24 January 2023)
Direct Saver 2.30% gross/AER 2.60% gross/AER
Income Bonds 2.30% gross/2.32% AER 2.60% gross/2.63% AER
Direct ISA 1.75% tax-free/AER 2.15% tax-free/AER
Junior ISA 2.70% tax-free/AER 3.40% tax-free/AER

Can you get better rates elsewhere? Of course you can! Remember that non-taxpayers and basic rate taxpayers have the personal savings allowance in 2022/23 of £1,000 of tax-free interest. At an interest rate of say 3%, you would need £33,333 on deposit before tax is triggered. Higher rate taxpayers only have £500 of the allowance, so at an interest rate of 3%, you would only need £16,660 on deposit before tax is triggered.  A year ago, you would have been hard pressed to be taxed on £100,000 of savings when interest rates were under 1%.

Taxing your savings2023-12-01T12:12:38+00:00
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