Investing can be challenging, with worries about risk and stock market volatility.
The last thing you need is the taxman helping himself to a share of the money you make – but unfortunately, that is exactly what he does.
But the good news is that there are ways to limit the amount he can take. At Continuum, we are looking at the solutions for tax efficient investing.
What exactly is tax efficient investing?
Investments are taxed in various ways. You may pay stamp duty when you purchase a share, you pay income tax on any dividends received, and capital gains tax (CGT) on any profit made when you sell them. If you hold shares when you die, they could be part of your estate, which could mean paying inheritance tax on them.
However, although it needs our tax revenue, the government also needs us to invest, to reduce the burden on the state in our retirement. So it provides several tax incentives and schemes that you can use to reduce the tax your investments cause you to pay.
If you keep shares in an Individual Savings Account (or ISA) then they should be protected from any income tax on dividends and capital gains tax on any profits you make. The annual ISA allowance, meaning the amount of cash you can put in, is £20,000 for the current tax year of 2020/2021.
Both you and your spouse can take out separate ISAs, and if you have children, they will have an allowance too. A Junior ISA allows you to save up to £9,000 into a tax-free account on behalf of your children, who can access the money when they reach the age of 18. They will have an adult ISA allowance from the age of 16.
When a child turns 16 they can open a normal ISA in addition to their existing Junior ISA.
This means that a family of two adults and two children with all their combined allowances, will be able to save or invest as much as £58,000 free from taxation in 2020-21. If the children are both between the ages of 16 and 18, the family could in theory put away up to £98,000 (a Stocks and Shares or Innovative Finance ISA can only be held by someone aged 18 or over)
Most people should consider ISA investment to take advantage of the efficiencies it provides.
Pensions are long term investments, and thanks to their very special status, which provide tax relief on the contributions you make, they can be very rewarding. Most pensions invest for you, and give you very little choice of how your money is used, but it is possible to arrange Self Invested Personal Pensions, or SIPPs, where you can have much more freedom to invest in individual shares.
Whether an ISA or a pension is the best investment shelter is subject to much debate, and will depend on your personal circumstances. You can usually put more into a pension, and you get tax relief upfront on any contributions you make. But there are restrictions on when you can withdraw the money, unlike ISAs which are generally considered to be more flexible.
You need an expert to help you with making the most of your tax efficient investment entitlements. Call to book a video meeting with someone from the Continuum team today.
Finding out more
Anything to do with tax can become complicated, and it is important to get expert advice to make the most of your pension, ISA allowance and other concessions.
At Continuum, we are ready to help. A call to us today could help you find ways to put more into your investments and less in the hands of the taxman.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation and trust advice or Will writing.
Innovative Finance ISA (IFISAs) are not protected under the Financial Services Compensation Scheme (FSCS). This means your money could be at risk if you save with an IFISA company that goes bust.