Investing may be a little more stressful than simply putting your cash into a savings account – the value of investments can go down as well as up – but the potential for much higher returns can make it all worthwhile.
But how you invest is important. There are some important changes that might make you want to check your investment portfolio, before the taxman helps himself to a larger slice of your wealth.
What has changed?
In his last budget, the Chancellor of the Exchequer announced a reduction in dividend allowance. In the 2017/18 tax year, you could receive up to £5,000 of dividends from your investments without tax being applied. But in the new financial year, this tax-free allowance will reduce to £2,000.
Dividends above this limit will cost basic rate taxpayers 7.5%, while higher and additional rate taxpayers, will pay 32.5% and 38.1% respectively. If you receive £6,000 of dividends a year additional rate taxpayers can pay up to £1,143 extra in the new financial year, and remember, this is not a one off charge. You could find yourself paying it every year under the current tax arrangements.
However, dividends from investments held within an ISA wrapper will remain free of these charges. It could make investing through an ISA even more worthwhile.
What can you do?
ISAs are highly tax efficient. You do not pay income tax or dividend tax on any of the returns that an ISA generates. So, the simple answer is to use your ISA allowance to the full. Using your entire £20,000 ISA allowance for the current tax year to buy a stocks and shares ISA might help maximise the dividends that you protect.
But what can you do if you don’t have £20,000 to invest this year, and what about the investments you have already made that are outside an ISA?
Bed and ISA
Rather than see your dividends eaten into by tax, you may be able to use a process know as ‘Bed and ISA’. This is a process that lets you move your existing investments held outside an ISA inside an ISA ‘wrapper’ to have protection against tax liability.
It is actually very simple, although you may need a sympathetic provider to take care of the details for you. It involves selling your investment and buying them back for inclusion in your ISA.
There are some limits on what you can do.
The amount you move into your ISA can’t exceed the annual allowance of £20,000, less any contributions you’ve already made in the current tax year. There may be no transaction fees on either the buy or sell side of your Bed and ISA transaction, but depending on your personal circumstances you may incur capital gains tax (CGT) on the sale.
As the process is a sale and repurchase, there may be a difference in price between the two deals. Many investments have a lower price to sell than buy, and even though the sale and repurchase will happen in quick succession, there may be movements in the market between the two.
You’re likely to have slightly fewer shares or units in your ISA than you held originally – but at least you can rest assured that they will be working for you, and not the taxman.
The value of investments can fall as well as rise and you may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.