Try buying into this GILTY pleasure to beat the taxman

As the government prepares to impose a record tax on savings, informed investors have found a clever trick to shield their income from the tax authorities.

Seven million savers are expected to pay a record £6.6 billion in tax this year on the income they earn from their savings, the tax authorities estimate.

High interest rates on fixed savings accounts should be a boon for households, but many households find themselves in a tax trap and will have to pay a high bill for the interest they receive for the first time in years. Fortunately, there is a safe way to earn a return on your money without the tax authorities taking a cut.

Rather than splashing out on one-year bonds offered by banks, investing in UK government bonds – known as gilts – can provide huge tax benefits.

Bella Caridade-Ferreira, the investment expert behind comparison website Compare & Invest, says investing in these bonds is a 'no brainer' this year. They will be particularly useful for higher rate taxpayers who have maxed out their £20,000 Isa allowance and £500 personal savings allowance this year.

Many investors are already aware of the loophole. Half of the ten most popular investments in September at stockbroker AJ Bell were government bonds. Meanwhile, at stockbroker Hargreaves Lansdown, purchases of conventional government bonds have increased by 538 percent in the past 12 months.

Those who make the most of this little-known trick can enjoy returns of more than 5 percent after taxes. But to really benefit, you need to choose the right government bonds and hold them until the end of their term.

WHAT ARE THE BENEFITS OF BUYING IN GILTS?

Savers who have diligently built even modest nest eggs are now getting stung. This is because the interest earned on savings is treated as income and taxed at your marginal income tax rate.

For basic rate taxpayers the taxpayer takes 20 per cent on the interest earned above £1,000 per year, for a higher rate it is 40 per cent above £500 and the tax authorities pay 45 per cent on anything they earn. These grants are looking increasingly stingy as interest rates skyrocket.

Investing in government bonds has two major advantages. The first is that government bonds are safe investments, unlike some other types of bonds, namely those issued by countries on the brink of bankruptcy. The second is that the returns you get from it are free of capital gains tax, which applies to many other investments such as shares, funds or investment trusts outside an Isa.

Gilts are simply IOUs that you can buy from the government. That money could be used to pay for everything from the NHS to British schools. In exchange for lending your money to the government, you receive a periodic payment called a “coupon.” At the end of the bond's term, when it matures, you get back the original amount you paid for the bond – known as its 'face value'.

The only reason you might not get your money back is if the government goes bankrupt and can't pay its debts. This means investing in government bonds – UK government bonds – is as safe as putting your money in National Savings & Investments (NS&I) accounts, which are also guaranteed by the UK government, says Laith Khalaf, head of investment analysis at investment platform AJ Bell . .

While the interest you earn from government bonds is subject to tax like any other income, the capital gains you make from them are not.

And because government bonds often trade at a discount on the secondary market – for example with stockbrokers – you can buy them for less than the price you get back when the government bonds mature. This means that you can realize a guaranteed added value at the end of the term.

Jason Hollands, of asset manager Bestinvest, says this makes investing in government bonds more tax efficient than holding money in cash, especially for those who have used up their Isa allowance and are holding money outside their pension.

HOW TO UNLOCK 5 PERCENT-PLUS RETURNS

The key to success, Khalaf says, is being able to calculate how much money you'll save by not paying capital gains taxes versus how much tax you'll have to pay on the interest you earn. Once you master this, you can achieve an after-tax return of well over 5 percent.

His calculations show that a basic rate taxpayer who has already used up his or her personal savings allowance of £1,000 a year could receive an after-tax return of 5.31 per cent on government bonds maturing at the end of January 2024.

Higher rate taxpayers who only have a £500 savings allowance will find their return is 5.24 per cent, and higher rate taxpayers 5.25 per cent. By contrast, Metro Bank's best-buy, one-year bond, paying 5.8 percent, would give basic-rate taxpayers an after-tax return of 4.68 percent, higher-rate taxpayers 3.51 percent and additional-rate taxpayers 3.22 percent. cents.

WHAT ARE THE BEST GILTS TO BUY – AND WHY?

Each gold-plated coin has a different price, coupon and expiration date, which means you need to choose carefully.

Fortunately, the expiration date and coupon are in the name of the gold, so this information is easy to find out.

Some examples of government bonds with low yields and relatively close maturity dates are: Treasury 0.25% 31/01/2025 or Treasury 0.125% 31/01/2028.

In order to calculate the after-tax return you will receive, you will also need to know the current price of the gold-plated gold. For example, the gold-plated example that expires on January 31, 2025 is currently available for £95.15. This yields €100 at the end of the term.

That means you would receive a capital gain of £4.87 for every £95.15 you now spend on this government bond, or 5.1 per cent of your investment. You also receive a return of 0.26 percent, or 26 cents, for every €100 you invest – on which you have to pay tax.

According to AJ Bell, the average government bond buyer bought £129,000 worth of government bonds in September.

If you want to stash your money away for longer, the amounts will look slightly different. The gold-plated example with an expiry date of January 31, 2028 is currently available for a price of £85.31.

On January 31, 2028, it will earn you £100, giving you a 17 percent capital gain on your original investment over a period of just over three years. Additionally, you will receive a taxable coupon payment.

MURDERED? HERE'S HOW – AND WHERE – YOU BUY

If you've never purchased gilts before, the process may seem difficult. You need to consider the costs of both buying and holding the gilts.

You can buy government bonds directly through the Debt Management Office, the government's debt issuer.

It offers a buying and selling service for gilts, meaning you can buy and sell gilts that are already on the market.

To use it, you must join an 'approved group' of investors, and you will be charged 0.7 percent of the value of the government bonds to buy them and the same amount to sell them, with some discounts if you are dealing with more shares. than £10,000 in gold-plated coins at a time.

There is more information about this service at dmo.gov.uk.

Alternatively, you can buy and sell government bonds through a stockbroker or an online trading platform. Many of these only allow you to buy government bonds over the phone, although some have a select number that can be purchased online.

MAKE SURE TO USE YOUR ALLOWANCES FIRST

Although government bonds can offer significant tax benefits, not everyone should take advantage of this loophole.

Make sure you spend all your personal savings first. If you don't pay taxes on your savings interest, it may be cheaper to use a high-interest savings account.

The same applies if you can still use some of your £20,000 Isa allowance. Virgin Money has a one-year Isa of 5.65 per cent.

If you are saving for your retirement, you may be better off using a pension; the benefits of the tax credit are too great to miss.

And if the calculations for government bonds are too complex, don't take the risk. Use savings instead.