Tax-efficient investments
11 June 18  /  Insights

When deciding where to invest your money, it is important to consider the tax that you may have to pay on your returns and how to ensure you boost your income without being penalised by the taxman.

Pensions continue to be one of the most tax-efficient ways to save, particularly for higher-rate taxpayers, because those who fall into the 40% tax bracket are likely to only pay the basic rate in retirement.

Start putting money into your pension pot as early as possible and take advantage of employer’s and government contribution to grow your funds more quickly.

Since 2015, savers are now able to withdraw as much cash as they want from their pension at the age of 55, but it is important to acknowledge that only 25% of this income is tax-free. Therefore, taking your pension out in stages over a number of years could be more tax-efficient and potentially not push you into a higher tax bracket with other earnings. Those who withdraw more in a lump sum will generally pay more income tax.

Savings and ISAs
As of 6th April 2016, tax payers paying the basic rate do not have to pay tax on the first £1,000 of savings income they receive each tax year, higher rate tax payers don't have to pay tax on the first £500 of savings income received each tax year, and additional rate tax payers don't have a personal savings allowance.

Savings accounts can suffer if the inflation rate is high or increased, as interest rates tend to be lower, meaning your wealth is not growing as quickly.  

Individual savings accounts (ISAs), however, are tax-free savings accounts and the most tax-efficient savings. Any income from investments held within an ISA is not subject to Income Tax. Utilising your annual tax-free ISA allowance, which remains at £20,000 for 2018/19, can be a useful way of reducing the impact of tax on your potential investment returns. Any profits you receive from investments are free of capital gains tax.

Changes to dividends
Paid to shareholders when the business makes a profit, dividends used to be a very tax-efficient way of paying yourself. However, from April 2016, the 10% dividend tax credit was abolished and replaced with a new tax allowance of £5,000 per year (which has been reduced to £2,000 per year as of April 2018), at the following tax rates:

  • Basic rate taxpayers: 7.5%
  • Higher rate: 32.5%
  • Additional rate: 38.1%

 As a much less attractive option, many choose to put themselves on the PAYE system or choose to put payments into ISAs or pension schemes.   

Capital Gains
Capital Gains Tax (CGT) is a tax on the profit when you sell an asset that has increased in value. It is the monetary gain that is taxed, not the amount of money you receive. It applies to many investments such as shares in companies, investment trusts, second properties, and unit trusts.

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance, the Annual Exempt Amount, which is £11,700 for 2018/19, and some assets are tax-free, such as gifts.

Inheritance Tax
In 2018/19 tax year, the inheritance tax threshold remains at £325,000 for individuals and £650,000 for couples.

An easy way to stay below the threshold, to avoid inheritance tax, is to gift your assets away, as long as you live for a further 7 years. You can also give £3,000 worth of gifts each year, free from inheritance tax. Additionally, you can put assets into a trust as these will not form part of your estate upon death. You may also leave something for charity, which will reduce inheritance tax from 40% to 36%. You can be tax-effective with sound inheritance tax planning.

Click here to find out more about paying less inheritance tax.

Enterprise Investment Scheme
The Enterprise Investment Scheme is a UK government tax relief scheme designed to encourage private investment into early stage unquoted companies, a publicly-traded company that used to trade on an exchange but no longer does.

With this type of investment, you can take advantage of the following reliefs on up to the limit of £1m of investment made into eligible companies per year:

  • Income tax relief of 30% of your investment
  • Capital Gains exemption on profits earned on shares
  • Inheritance Tax exemption on shares held for a minimum of two years.

Venture Capital Trusts
These trusts are stock market traded funds that invest money into a group of small companies. They are often deemed to be high risk, but the Government offers generous tax breaks to encourage as many people as possible to support such firms.

They do offer some income and capital gains tax relief:

  • No capital gains tax on the profit or growth of your shares
  • 30% tax relief on newly bought shares
  • No income tax on dividends from your shares.

It is certain that you will have to pay some tax when you commit to increasing your investment portfolio and assets. Conditions of tax relief and deductions are also different for each person depending on their personal circumstances.

As your financial planner we aim to provide you with some clarity on your individual financial future and to simplify these complex matters, helping you achieve the most tax-efficient investments as possible, tailoring your tax-efficient investing strategies and ensuring you are meeting your financial goals.

To find out more about creating your tax plan, get in touch with one of our Lifestyle Financial Planners today by calling 01865 208012 or click here to email your enquiry.