Tax: now for something completely different

11/06/2009

This month we make a very short tour on tax and financial products.  

Not in great detail, but enough to remind you that the tax treatment of savings and investments can be relevant to your decision as to whether to go for them or not.  But bear in mind, the tax tail should never wag the financial dog.

 

In some cases, the way you save money makes no difference at all. The interest on a savings account for a non-taxpayer will be tax-free (provided an R85 is in place), so there is no extra benefit in saving in a cash ISA. All that matters is the rate of interest and the terms and conditions such as easy access or limited withdrawals etc.

 

Sometimes a non-taxpayer should not be investing in a product (such as an insurance-based investment bond) which is taxed at source and the tax is non-reclaimable. Sometimes you need to plan well ahead with, say, a three-year bond which rolls up the interest and pays out in the last year, maybe pushing you above the threshold where you start to lose your age-related allowances.

 

Having said that, the decision can be more problematical. Perhaps you have some windfall or privatisation shares which pay dividends with the non-reclaimable 10% tax credit deducted. You acquired them when working and still a taxpayer, so that was fine. Now retired, your income has dropped and you are no longer a taxpayer. Should you sell them because you can’t get the tax back?

 

It’s not that easy because those shares might be steadily increasing in value so that you might do better hanging on to them and eventually selling at a decent tax-free profit – tax-free because you have an exemption from Capital Gains Tax this year of £10,100.

 

Likewise our better-off readers teetering on the brink of paying 40% tax on earnings may well prefer to invest in something offering capital growth rather than income, to avoid pushing them into the higher rate band. That could have a knock-on effect elsewhere because not merely is the 10% tax credit on dividends not reclaimable, the higher rate taxpayer has to stump up a further 22.5% on them. So they might well decide to shelter as many shares as possible in ISAs which will protect them from the extra charge. Whereas ordinary basic rate taxpayers gain no such benefit even in ISAs.

 

The tax credit is deducted there anyway unreclaimably. (Don’t forget, though, that corporate bonds held in ISAs pay interest which is tax-free.)

 

We have mentioned previously about National Savings & Investment products, some of which are paid tax-free. As, however, with all things in life, there is a balancing drawback. Since NS & I are backed by the Government and are therefore regarded as safe as houses (and we don’t want a flood of phonecalls telling us that’s a pretty ropey assumption these days), the rates of interest are correspondingly low. Generally in investments, the higher the risk, the higher the return. You must therefore look at your attitude to risk, not just the tax.

 

The moral – tax is simply one element to be considered in your financial life.

This article is by TaxHelp for Older People (TOP), registered charity no.1102276. The helpline number for free tax advice for the over 60s on less than £17000 per year is lo-call 0845 601 3321 or geographic number 01308 488066.

 

By Carol Pavely of TaxHelp for Older People