Tax planning with investments

March 14th, 2016 by

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Dan Woodruff

Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.
Dan Woodruff

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9 ideas for tax planning with investments

9 ideas for tax planning with investments

As you approach the new tax year, you should examine methods to shelter your savings and investments from tax. Here are 9 ideas for tax planning with investments. If a married couple used all of these to the maximum you could shelter an amazing £2,826,680 from tax in the new tax year.

Key points:

  • Tax planning with investments can be complicated – seek advice from a professional first
  • Why consider tax planning with investments?
  • Should tax planning with investments tax place at the start or the end of the tax year?
  • 9 methods for tax planning with investments
  • Get our tax planning with investments summary document

Why consider tax planning with investments?

If you can shelter your money from tax legally, then why not use your tax allowances? The money you shelter from tax (primarily income tax and capital gains tax) will grow at a much faster rate than if you are taxed on your income or gains.

Income tax

Income tax is paid at 0%, 20%, 40% and 45% on earned income. You also pay this tax on savings and corporate bond interest.

Capital gains tax

Capital gains tax is paid at 10% or 20% for gains on investments, and 18% or 28% for gains on property. You pay this tax on the capital growth in the value of your investments and property when you dispose of them – when you sell funds or properties, or you give them away.

Should tax planning with investments tax place at the start or the end of the tax year?

In most cases you will get the best possible return on your money if you invest in tax planning with your investments at the start of the tax year. Don’t wait until the last minute at the end of the tax year as you risk losing your tax-free allowances in some way. Of course, some tax allowances are not available immediately – for example, you may need to wait until you receive a bonus to shelter that money from tax. If you have the capital put aside in taxable investments or savings, then you should consider moving this money into tax free shelters as soon as you can each tax year.

9 methods for tax planning with investments

Important:

Tax planning with investments can be complicated, so you should always seek advice from a financial planner and/or a tax adviser. Investments can go down as well as up, so take care to understand the risks before you commit your funds. Please bear in mind that this is a summary of some ideas, and not a substitute for advice. Clearly, there are many other methods available, which are beyond the scope of this article. These are Government-sponsored allowances for you to use, and we have ranked them from the simplest to most complex.

Income tax allowance

How much?

  • £11,500 per person per tax year

How?

  • Via your salary or tax return.

Benefits

  • Each person pays 0% income tax on earnings below this level.
  • Consider using this allowance where you can control your income (via a business).

Downsides

  • Most people cannot control their income

Personal savings allowance

See our article on the personal savings allowance.

How much?

  • £1,000 per person per tax year if you do not pay 40% income tax;
  • £500 if you pay 40% tax;
  • Additional allowance of up to £5,000 available, provided your non-savings income is below £16,000.

How?

  • All savings and bond interest up to the limit is free of tax

Benefits

  • Savings and corporate bond interest is received tax-free.
  • Applies to investments held outside of ISAs and pensions.

Downsides

None although you pay tax on the additional interest.

ISA allowances

Read more about how ISAs work.

How much?

  • £20,000 per person per tax year from 2017/18.
  • £4,128 for each child

How

  • Fund from your savings or from taxable investments (such as your general investment account),

Benefits

  • Tax-free growth – fund grows free from income tax and capital gains tax.
  • All income and capital withdrawals free from income tax and capital gains tax.
  • Your spouse can take over your accumulated ISA allowances after your death.

Downsides

  • None.

Dividend allowance

Read our article on the new dividend tax rules.

How much?

  • £5000 per person per tax year (£2,000 from April 2018)

How?

  • All dividend income up to £5,000 is free of tax

Benefits

  • Dividends from shares or businesses are received tax-free.
  • Applies to investments held outside of ISAs and pensions.

Downsides

  • Business owners are likely to pay more tax.
  • You pay tax on the remaining dividends at 7.5%/32.5%/38.1%

Pension Annual Allowance

Read how pensions tax relief works.

How much?

  • Up to £40000 per person per tax year
  • Reduced to £4,000 if you have taken flexible pension income
  • If your total income is over £150000 your allowance reduces gradually to £10,000 p.a. via the tapered annual allowance for high earners.

How?

  • From earned income or business contributions – both before tax.
  • Without earned income you can save a maximum of £2,880 per tax year.

Benefits

  • Fund grows free from income tax and capital gains tax.
  • Tax relief on contributions
    Personal contributions get immediate uplift in pension: £100 contribution attracts additional £25 tax relief. 40% tax payers get to claim an additional £41.66 per £100 saved via your tax return. 45% tax payers get to claim an additional £56.81 per £100 saved via your tax return.
  • Company contributions save corporation tax at 20%.
  • 25% tax-free cash at retirement.

Downsides

  • No access until at least age 55.
  • Income from pensions is taxed as income between 0% to 45%.
  • Personal contributions over £2880 must come from earned income.

Pension Carry Forward

How much?

  • Carry Forward from previous 3 tax years – potentially £130000 available

How?

  • You must make the maximum allowable pension contribution in the current tax year, and then use the earlier 3 years, starting with the earliest year.

Benefits

  • Fund grows free from income tax and capital gains tax.
  • Tax relief on contributions:
    Personal contributions get immediate uplift in pension: £100 contribution attracts additional £25 tax relief. 40% tax payers get to claim an additional £41.66 per £100 saved via your tax return. 45% tax payers get to claim an additional £56.81 per £100 saved via your tax return.
  • Company contributions save corporation tax at 20%.
  • 25% tax-free cash at retirement.

Downsides

  • You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.
  • No access until at least age 55.
  • Income from pensions is taxed as income between 0% to 45%.
  • Personal contributions must come from earned income.
  • You must have been an active member of a pension scheme in the tax year you want to claim unused relief

Enterprise Investment Schemes (EIS)

How much?

  • Up to £1,000,000

How?

  • Income tax relief and capital gains tax deferral

Benefits

  • 30% upfront income tax relief on investments up to a £1 million for the current tax year and/or £1 million carried back to the previous tax year.
  • Capital gains tax deferral for the life of your investment – investments offset other capital gains.
  • Tax-free growth provided you qualify for income tax relief.

Downsides

  • Very high risk.
  • Your shares must still qualify for relief at all stages.
  • Offset capital gains will attract tax when you sell your EIS.
  • You must hold the EIS for 3 years or you lose the tax relief.

Venture Capital Trusts (VCT)

How much?

  • Up to £200000

How?

  • Income tax relief

Benefits

  • Up to 30% income tax relief if you invest between £5000 and £200000 in any tax year.
  • You can reinvest and attract further tax relief after 5 years.
  • Tax-free dividends.
  • No capital gains tax on gains.

Downsides

  • Very high risk.
  • You must hold the VCT for 5 years or you lose the tax relief.

How to start tax planning with investments

Any use of the above tax planning ideas should start with a plan of action to establish how the investments may impact on other areas of your finances. We do this via our Financial Planning service. If you’d like to discuss tax planning with investments contact us.

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