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Make the most of these 7 tax benefits

See our latest tips on saving and claiming back tax

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There’s lots of evidence to suggest taxes could be set to rise.

The Institute for Fiscal Studies (IFS) has calculated that the UK faces 20 years of tax rises to fund the government’s promises to the NHS.

And if that’s not enough, Chancellor Philip Hammond himself admitted that ‘we may have to raise a little more tax in order to support the NHS and deliver on our pledge’. Which taxes will rise is difficult to say.

But if you’re looking for simple and effective ways to shelter your investments from any future tax rises right now, we’ve provided 7 top tips to help.

Please note, tax rules can change and as always the benefits will depend on your individual circumstances. This article is not advice. If you are unsure of the suitability of an investment or course of action for your circumstances, please seek advice.

1. Use the ISA allowance

Over 10.8 million people contributed to an ISA last tax year. And it’s easy to see why. They’re simple, flexible and one of the best ways to shelter your investments from the taxman.

If you’re over 18 and a UK resident, you can contribute up to £20,000 to a stocks and shares ISA this tax year and there’s no UK income or capital gains tax to pay on your investments. And although it’s designed for the long term, you can take money out if you really need to.

The ISA allowance is one of most generous tax breaks from the government and a reason we believe every investor should consider using it.

The tax year ends on 5 April so if you want to make full use of your allowance this year, you should act soon.

Find out more about ISAs

2. Get money into a pension

Investing in a pension for retirement is one of the most tax efficient ways to save. But there are still big question marks over how long higher-rate tax breaks will be available.

Pension contributions currently receive up to 45% tax relief. For example, a £1,000 investment into a self-invested personal pension (SIPP) benefits from 20% basic rate tax relief (£250) added automatically. Higher-rate taxpayers can claim up to a further £250 in tax relief, while 45% rate taxpayers can claim back up to £312.50.

You must pay sufficient tax at the higher or additional rate to claim the full tax relief via your tax return. Scottish taxpayers pay different rates of tax so the amount they can claim back is different.

If you’re a UK resident, under age 75, the general rule is you can contribute as much as you earn to pensions per tax year and receive tax relief. Contributions in excess of the annual allowance (currently £40,000 for most people) will be subject to a tax charge. Remember you can’t normally take money out of a pension until you’re 55 (57 from 2028).

Discover more about SIPPs

3. Don’t forget about capital gains

Every year, you can realise a certain level of gains without paying capital gains tax (CGT). This tax year (2018/19), the allowance is £11,700. If you’re a basic rate taxpayer, there’s 10% tax to pay on any realised gains on your investments over your allowance. And if you’re a higher or additional rate taxpayer, you’ll pay 20%.

So, if you have gains of £23,400 from your investments and decide to sell in one go, you’ll pay £2,340 in capital gains tax (£23,400 minus £11,700 taxed at 20%).

But if you spread the gains over two years (realising gains of £11,700 each year), you’d pay no tax.

If you want to take advantage of this allowance, you’ll need to do so before the end of the tax year (5 April) as you can’t carry it forward to next year.

4. Shelter income investments

Currently, all taxpayers have a tax-free dividend allowance of £2,000 a year. After this, the rate of tax payable on dividends depends on the investor’s other taxable income. You’ll pay 38.1% in income tax if you’re an additional rate taxpayer.

The dividend allowance was reduced on 6 April 2018 and there’s been speculation it could be scrapped altogether.

So if you’ve got investments generating income, you might want to consider sheltering them in a tax wrapper, like a stocks and shares ISA.

One of the easiest ways to do this is with a Bed and ISA, where your investments are sold and the proceeds used to top up your ISA. You can then choose to repurchase the same investments, buy another investment or hold cash. Don’t forget any sales might crystallise gains for capital gains purposes.

Find out more about Bed and ISA

5. Pension for a spouse

Investing in a pension for a non-earning spouse is one of the most generous of government pension giveaways.

Non-earners can make a £2,880 pension contribution and the government adds £720 in tax relief, even if the individual pays no tax.

Pensions can usually be accessed from age 55 (57 from 2028), 25% of the value of the pension fund can normally be taken as tax-free cash, with the balance being taxable. However if further withdrawals fall within the individual’s personal allowance each year, these could also be tax-free.

Read more about SIPPs

6. Consider the Lifetime ISA

In most cases, pensions are the best way to save for retirement. You can get generous tax relief and contributions from your employer.

But if you’re looking for additional tax-efficient ways to save and you’re aged between 18 and 39, you could consider a Lifetime ISA (LISA).

With a LISA, you can contribute up to £4,000 of your ISA allowance each tax year (up until age 50) and get a 25% bonus from the government. This money can be withdrawn tax free when purchasing an eligible first home or after age 60. Other withdrawals will usually mean a 25% government charge, so you could get back less than you put in.

You’ll need to keep the LISA open for 12 months before using it to buy a first home.

Discover more about the Lifetime ISA

7. Invest in Venture Capital Trusts (VCTs)

Taxpaying investors, if they have a lot of knowledge and experience and are happy taking higher risks in return for the potential for higher rewards, could consider VCTs.

These invest in some of the most dynamic, entrepreneurial, companies with lots of potential for growth. They’re long-term investments which give you the chance to get in on the ground floor of fledgling investment opportunities.

Smaller companies are higher risk than larger companies, so there’s a bigger risk of failure. For those who pay sufficient tax, a £10,000 investment in VCT could cost as little as £7,000 after tax relief, and generate tax-free dividend income over time. All investments fall as well as rise in value, so you could get back less than you invest.

Read more about VCTs

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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