Will capital gains push me into the 60% tax bracket?

Q. I am retired and have income from pensions, cash interest and capital gains on funds. I believe that when calculating adjusted net income to determine whether any income lies in the £100,000-plus effective 60% tax band, capital gains are not included. Is this correct? 

A. Yes. According to the government website, the aspects of your finances relevant to determining your adjusted net income, and hence whether you may fall into the 60% tax band, are the following: 

• money you earn from employment (including any benefits you get from your job)
• profits you make if you’re self-employed, including from services you sell through websites or apps
• some state benefits
• most pensions (including the State Pension, company and personal pensions and retirement annuities)
• interest on savings and pensioners bonds
• dividends from company shares
• some rental income
• income from a trust
• foreign income

Capital gains are not on the list, so you can safely disregard any capital gains you have made when you work out your adjusted net income to determine whether you will be caught by the 60% tax band. 

But note that certain other types of income, such as fund distributions, accumulation income, excess reported income, and profits on non-reporting offshore funds, may be taxable income and can affect adjusted net income. Your taxable income can also affect the rate of CGT you pay. Capital gains are ignored when calculating adjusted income for the personal allowance taper that gives rise to the 60% band, but CGT rates are calculated by reference to your taxable income and the amount of your taxable gains. So while capital gains do not push you into the effective 60% income tax band, your income level can determine whether gains are taxed at the lower or higher CGT rate.

The 60% tax band, incidentally, comes about because of the way in which the tax-free personal allowance is gradually withdrawn once your annual income exceeds £100,000. The details, and why it results in an effective income tax rate of 60% (or more in Scotland), are explained in this article from last year: The hidden 60% tax rate – and how to avoid it. 

You say you have taxable income from cash interest and capital gains on funds. If you have any ISA allowance remaining you may be able to reduce your tax bill by moving cash into a cash ISA and funds to a stocks and shares ISA. Moving existing funds into an ISA normally involves selling them and then repurchasing them inside the ISA, so the sale may crystallise a gain or loss for CGT. The ISA shelters future income and gains from tax. 

Alternatively, you may want to consider gilts – bonds issued by the government – as an alternative to cash. If you choose those with a small ‘coupon’ – the annual interest paid as a percentage of face value – most of your returns will take the form of capital gains, which are tax-free for certain gilts. A list of gilts that qualify for CGT exemption can be found here. Remember that, unless you hold to maturity, there is a risk of loss owing to market movements. Coupon interest remains taxable as savings income. Only gilts you hold directly, not those in a fund, qualify; gilts can be bought and sold via the government’s Debt Management Office. Certain corporate bonds, if held directly, also qualify for the CGT exemption, although here of course there is the additional risk of default. 

We also received this question from a reader about the very high effective tax rates brought about by the gradual withdrawal of the personal allowance when incomes exceed £100,000 a year: 

Q. I am retired and aged more than 75. I live in Scotland and my income is more than £100,000. How do I avoid paying 67.5% tax on any additional income I withdraw from my SIPP?

A. By the sound of it, your other income already takes you into the £100,000+ 60% bracket discussed above, although in your case the effective rate is even higher at 67.5%. That figure reflects the Scottish ‘advanced’ rate of income tax plus the effect of losing the personal allowance; it would not apply in the same way to savings interest or dividends, which are taxed under UK-wide rates.

Your options for reducing your tax rate on SIPP withdrawals are limited; charitable donations may be your only realistic option. Where Gift Aid applies, the amount you can take off when calculating the tax due is boosted by 25%. So if you make Gift Aid donations of £1,000, you can take £1,250 off your net income – £1,000 plus £250, the value of the basic-rate tax.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

• Read: What is Capital Gains Tax? The basics
• Read: How do I avoid double tax on my pension?
• Read: What happens to unused tax-free cash in my pension?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.