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Property or ISA’s and Pensions

Property or ISA’s and Pensions

Very much horses for courses and always down to individual circumstances, but have a think about this tax example:

Although there is no national insurance on rental income, income from property may be a lot less tax efficient than income from investments like shares with attractive dividend yields or bonds. Dividends and interest income are completely tax free if your money is sheltered in an Individual Savings Account (ISA), or Pension. Even investing outside of an ISA or Pension, these types of income may also be tax-free, thanks to the dividend allowance or one of the tax-free allowances for interest income. This tax planning point is important for amateur or part-time landlords who are weighing up the pros and cons of investing in property versus other investments.

For example, a higher-rate tax payer who receives £10,000 of dividends from shares held in an ISA will pay no income tax. If the same individual receives £10,000 of rental income, income tax on £4,000 will typically be payable.

If your existing taxable income is £100,000 and you earn an additional £10,000 of rental income you may end up paying additional income tax of £6,000, i.e. 60% of your profits will go to the taxman. You will be left with just £4,000 versus the £10,000 you could have received in tax-free dividends. The 60% tax figure arises due to the loss or partial loss of your personal allowance. For example, someone who earns £100,000 and receives an extra £10,000 will pay 40% tax on the extra income - £4,000. You would have your personal allowance reduced by £5,000 which means you will have to pay an extra £2,000 in tax (£5,000 x 40%). Total tax on extra income: £6,000 which is 60%!

Disclaimer: The information above is general guidance only and does NOT constitute accountancy, tax, investment or other professional advice.
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