Going over higher rate threshold to use current year's ISA allowance

[Freaki Li Cuatre]

I've just opened a stocks & shares ISA with HL & have transferred over my cash ISA. I'm also wondering whether I should pay in the £11k (or whatever) allowance for this year. (I have the profits in my Ltd & would have to pay myself a divi) A lot of emphasis is put on using your ISA allowance to the max.

Problem is, I'm right up to the higher rate threshold so I'll be paying 20% on that . Does that make any sense or should I only pay in what I have left over without going over the threshold (i.e. nothing this year).

[ASB]

What else would you do with it if you just left it in the company?

Only you can value the alternatives. Though I always used to take the view of take whwg I need. The tax consequences flowed from that.

The point is at sone point the money will come out of the company. There will be tax consequences at that point. Are they likely to be significantly different then than now?

[Freaki Li Cuatre]

What else would you do with it if you just left it in the company?

Only you can value the alternatives. Though I always used to take the view of take whwg I need. The tax consequences flowed from that.

The point is at sone point the money will come out of the company. There will be tax consequences at that point. Are they likely to be significantly different then than now?

Well, I could stick it in my pension (already made a contribution this year & don't want all my eggs in one basket) or I could draw it as divis in subsequent years but making sure I stay under the threshold.

Attempting to answer my own question myself - lets say I draw £10k to invest in the ISA with a view to keeping it invested for a minimum of 5 years.

Tax @20% = £2000
Return on investment assuming 6% pa growth over 5 years = £3382.

So, on that basis, yes, I guess it would pay to do it.

[Martin at NixonWilliams]

I've just opened a stocks & shares ISA with HL & have transferred over my cash ISA. I'm also wondering whether I should pay in the £11k (or whatever) allowance for this year. (I have the profits in my Ltd & would have to pay myself a divi) A lot of emphasis is put on using your ISA allowance to the max.

Problem is, I'm right up to the higher rate threshold so I'll be paying 20% on that . Does that make any sense or should I only pay in what I have left over without going over the threshold (i.e. nothing this year).

The higher rate tax on dividends is 25% of the net dividend (or 22.5% of the gross). I am all for using up your ISA allowances where possible however suffering 25% in tax just to use this allowance may not be an efficient approach.

It is difficult to weight up - A lot depends on how the money would otherwise be taxed if left in the company and the returns you would get on the ISA long term. For example, if the same money could be taken from the company tax free in the future, or even at 10% if taken with entrepreneurs relief, then it might be better taken then as less tax will be paid overall. Having said that, it is difficult to quantify what has been lost long term by missing out on your ISA allowance for this year.

I'm aware that HL have sent information to their customers putting a lot of emphasis on maximising these allowances, but remember they have an interest in the deposits you make..

[ASB]

Just illustrating some numbers,

ISA route.

10,000 -> 8,000 x 1.05 ^ 5 = 10210

Pension.

10,000 co contribution = 2.500 reductionin CT. Call it a 12,500 contribution.

12,500 x 1.5 ^ 5 = 15953.

So that looks miles ahead - but is it really? 25% lump sum and the rest is taxable income one way or another. So if you are 20% payer at that time:-

Tax take = 15953 * .75 * .2 = 2392. Return = 13560.

Or 40% payer: Tax take = 4785. Return = 11167

[Yes I know the pension won't actually work like that in practice, but it provides a reasonable guide. The assumption also is that the return is the same either way - which invested in the same way broadly speaking it should be].

Of course you could bung the 8k in as a personal contribution, thus 10,000 goes in. And you get 1333 higher rate tax relief.

10,000 * 1.5 ^ 5 = 12762. = 1914 or 3828 tax. = 10848 or 8934. Add in the 1333 = 12181 or 10267.

Thus the savings by pension are not really significant unless you change from being a higher rate payer to a lower rate payer in which case they can be worthwhile.

Pension is largely a means of tax deferment unless your circumstance change in terms of your marginal tax rate dropping. And you lose flexibility.

If you happened just to leave it in the company then at the time of wind up you should be able to get some relief under whatever for of ER may or may not be available and pay capital taxes on whatever the regime is then.

Personally my view is that if you are not caught by IR35 it is probably just worth suffering the hit and getting the funds in your hands now to do with whatever you want.

[Freaki Li Cuatre]

Excellent illustration thanks.

And I'm guessing I need to account for 25% tax as Martin points out so the £8000 becomes £7500 in the ISA route which makes the benefit even more marginal.

[TheCyclingProgrammer]

I personally can't see the point in paying higher rate tax to earn pitiful savings interest but it depends how big your war chest is. If it's very healthy and it won't make a dent in it you could do this but I would leave it until I need it.

No mortgage you can overpay?

[Freaki Li Cuatre]

I personally can't see the point in paying higher rate tax to earn pitiful savings interest but it depends how big your war chest is. If it's very healthy and it won't make a dent in it you could do this but I would leave it until I need it.

No mortgage you can overpay?

It's going in a stocks and shares ISA.

Yes, I do have an outstanding mortgage. Hadn't really thought about that. I'm actually about to increase it to get an extension done though. Maybe I should just use the money towards that. Decisions, decisions....

[TheCyclingProgrammer]

Yes, I do have an outstanding mortgage. Hadn't really thought about that. I'm actually about to increase it to get an extension done though. Maybe I should just use the money towards that. Decisions, decisions....

Well that would get my vote. If you can afford to take a chunk of profit out of YourCo without impacting your war chest then putting it towards your extension makes complete sense to me. Its either going to reduce the amount you need to remortgage or save you more interest in what you could save right now. It's what I'd do anyway.

[ASB]

It's going in a stocks and shares ISA.

Yes, I do have an outstanding mortgage. Hadn't really thought about that. I'm actually about to increase it to get an extension done though. Maybe I should just use the money towards that. Decisions, decisions....

I have no idea of your interest rate, but in many cases it is more sensible to pay down debt; otherwise you are in effect investing on margin at a cost of your mortgage rate. I am not saying that's a bad thing, a lot of that is down to personal attitudes and risk.

Say you have a 3% mortgage rate. Then overpaying gives you a guaranteed effective 3% return (or approx 5% gross as a 40% taxpayer).

If you invest funds rather than overpaying you need to deduct this from the return. Just something else to factor in.