Tax Saving Opportunities
Cost. Of. Living. Three little words that have been on everyone’s mind over the past year. The November 2022 tax changes and the general economic turmoil we’ve experience over the past few years, mean that making sure your hard-earned income and savings are working for you, not against you, has never been more topical.
With that in mind, there are many tax saving options that you as an investor may wish to consider. Of course, everyone’s circumstances are different, and it would be beneficial to seek advice from a Financial Adviser before making any decisions.
Individual Savings Accounts – ISA
ISAs are available to every UK resident over the age of 16 years old. There are several types of ISA available, you can only open one Stocks & Shares ISA and one Cash ISA during each tax year, provided you do not exceed the annual ISA allowance (This tax year, that’s £20,000 per person).
The Autumn budget saw the Capital Gains Tax (CGT) Allowance reduce from £12,300 to £6,000 (this is due to fall again to £3,000 in 2024/25). One of the main benefits of an ISA is that any income you earn or capital gains you make are not currently subject to UK tax.
There’s also the Lifetime ISA, which is available to under 40s. You can use up to £4,000 of your ISA allowance toward this and the Government will provide you with a bonus of 25% on your contribution. The caveat is that you must either use the funds to buy your first home (up to a value of £450,000) or wait until age 60 to withdraw the funds.
Children under 18 can invest in Junior ISAs, which have an allowance of £9,000 per year. Again, there are both Cash and Stocks and Shares Junior ISAs, and you can open one of each per child per tax year. The parent will retain stewardship of the account until the child turns 18.
Young people aged between 16 and 18, are eligible for both the ISA and Junior ISA allowances, giving them a total allowance of £29,000 a year during this period. Though it should be noted that you must be 18 before you can open a Stocks and Shares ISA.
Another opportunity is to use your pension contributions to reduce the amount of income tax you pay. Personal pension contributions automatically qualify for 20% tax relief at source. If you are a higher or additional rate taxpayer, you can claim the additional 20% or 25% tax relief on your tax return.
This is something to consider if you are nearing the higher rate tax band (£50,271 per annum), or perhaps you now fall into the additional rate bracket (which reduced to £125,140 per annum following the autumn budget).
Like ISAs, there’s a maximum level of contributions you can make to your pension each tax year; this is known as the annual allowance. The annual allowance can vary from person to person, however, if you haven’t maximised your contributions in previous tax years you may be able to add more to your pension than you think, so it’s worth seeking advice to establish exactly how much you could invest. When it’s time to retire, you can take part of your pension (usually 25%) tax free. What’s more, unlike many other assets, pensions are currently considered to be outside of your estate for Inheritance Tax (IHT) Purposes.
For ‘money purchase’ pensions. if you die before the age of 75, your beneficiaries will receive the proceeds (either as a lump sum or income) free from tax. If your older than 75, when you die, your beneficiaries will pay tax at their marginal rate. (Note: the rules are slightly different for guaranteed pensions such as Final Salary schemes or annuities)
There are two types of Investment Bond: Onshore and Offshore. which could also be beneficial in certain circumstances.
Tax rules allow withdrawals of up to 5% of the original investment to be made annually, without triggering an immediate tax liability, instead, tax is deferred until the bond matures, which could be useful if you expect to pay a lower tax rate in the future. If unused, the 5% allowance can be carried forward. CGT is not applied to Investment Bonds.
Any Income earned is effectively taxed at 0% for an offshore bond and basic rate for an onshore bond. However, additional tax would be payable on gains at the time of maturity or surrender, or if you exceed the annual 5% withdrawal allowance.
Bonds can also be assigned to someone else without giving rise to an immediate income tax or CGT charge. This may be useful if the recipient’s income rate is lower than yours when they subsequently cash in the investment.
Other Tax Efficient Investments
For experienced, high-risk investors there are further schemes that could help reduce your tax liability. These include, Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs) and Seed Enterprise Investment Schemes (SEISs). The complexities of these products are beyond the scope of this article, but to summarise, these products could save income tax of 30% or 50% provided you meet the terms and conditions. There are also benefits for IHT and CGT, which can make these valuable tools for the right investor.
As we all know the world of tax is complex and potentially expensive. To make sure your money is held in the most tax-efficient manner for your circumstances and objectives, it’s worthwhile contacting an expert Financial Adviser, who can help you to explore the most suitable options for you and your family.
Author: Heidi Wozniak, Paraplanning Team Leader
Published: Ox Magazine
This article is intended for information only, and does not constitute advice. All information is based on our understanding of current law and practice, which may be subject to change in the future. Wise Investments Limited is authorised and regulated by the Financial Conduct Authority, FCA no. 230553.