As your income increases, the complexity of your finances may too. While our team at Investec Wealth & Investment could help you protect and grow your wealth holistically, there are simple steps you can take to ensure you are using available tax allowances for your UK savings and investments.
Maximise your ISA allowance
An Individual Savings Account (ISA) allows you to make tax-free gains on savings and investments. The ISA allowance for the 2022/23 tax year is £20,000 per person and this sum can be invested into a Cash ISA or a Stocks & Shares ISA.
A cash ISA is available to anyone aged 16 or over, while an ISA invested in any combination of cash and shares is available to those over the age of 18. It is advisable to check the terms and conditions of the ISA provider you choose, as some ISAs are flexible, meaning you can withdraw and then put the cash back into the account during the same tax year, without reducing your year’s allowance.
The Lifetime ISA (LISA) is available for people aged between 18 and 40, and can either be used to save towards buying a first home, or alternatively can be withdrawn after the age of 60. You can contribute up to £4,000 per year to a LISA. The government will add a 25% bonus to savings held in a LISA, up to a maximum of £1,000 per year, and this doesn’t count towards your ISA allowance. It’s also important to note that any withdrawals from the LISA that are not put towards purchasing a first home before the age of 60 will incur a penalty of 25% of the value of the withdrawal — therefore losing the interest applied.
Bear in mind that the money you put into a LISA each year forms part of your overall £20,000 ISA allowance — so if you put £4,000 in a LISA during the tax year, you'll be able to put £16,000 into other existing ISAs.
The Junior ISA is available to UK residents aged under the age of 18 who do not have a child trust fund account. Under-18s, or their parents can put up to £9,000 in a Junior ISA each tax year.
With so many different options available, it is sensible to review your arrangements regularly to ensure that both you and your family are optimising your use of ISAs. If unused, an ISA allowance cannot be carried from one tax year to the next.
Consider putting more into a pension
Offering tax relief on contributions and tax-free growth, a pension is a wrapper that allows for tax efficient investing. For the 2022/23 tax year the annual allowance (the maximum contribution which is eligible for tax relief) is the lower of your gross income and £40,000 including tax relief. You can also carry forward unused annual allowances from the previous three tax years, subject to certain rules, providing further scope for making contributions.
High earners should be aware that their annual allowance may be reduced.
In addition, if you have taken pension income via flexi-access drawdown or uncrystallised funds pension lump sums, you will be subject to the Money Purchase Annual Allowance (MPAA). If you trigger the MPAA, your gross annual tax-free pension contribution is limited to £4,000 including tax relief.
... especially if you have earnings in excess of £100,000
If you earn over £100,000, making pension contributions can be highly advantageous. Your personal allowance is reduced by £1 for every £2 of income above £100,000; this means your allowance is zero if your income is £125,140 or above. However, if you make a pension contribution, you are able to offset the reduction in your personal allowance.
Use your current Capital Gains Tax allowance
Capital Gains Tax (CGT) is tax on the profit when you sell or dispose of an asset that’s increased in value. In the tax year 2022/23 the annual tax free allowance is £12,300, meaning you can make gains up to this amount and pay no CGT; after that, the rate is dependent on the level of income tax you pay. Losses can be offset against gains but unused allowances cannot be carried forward.
There is the potential for assets to be transferred between spouses allowing you to utilise both your allowances, which would give married couples a total allowance of £24,600.
Consider investing in a Venture Capital Trust
Another option to consider is purchasing shares in a Venture Capital Trust (VCT) which invests in qualifying businesses. These are higher risk investments, which typically include smaller, private companies.
VCTs offer a number of tax reliefs, including up to 30% income tax relief of the initial cost of the shares which are then held for five years or more, up to the value of £200,000. Dividends are paid tax-free and can be sold without a Capital Gains Tax liability, should they rise in value.
... or an Enterprise Investment Scheme
As an alternative to VCTs, Enterprise Investment Schemes (EIS) also offer benefits to investors wishing to diversify into smaller, growing businesses. Again, investors can claim income tax relief of up to 30%, up to the value of £1million. This increases to £2m if any investment above £1m is into ‘Knowledge Intensive Companies'.
The investments can be used to defer capital gains arising on other assets. They also allow losses to be offset against other gains and should be free of Inheritance Tax after a holding period of two years. EISs have to be held for at least three years, otherwise income tax relief will be withdrawn and capital gains will be subject to tax.
Make the most of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you’re a business owner
Under Business Asset Disposal Relief — which prior to April 2020 was known as Entrepreneurs’ Relief — you may be able to pay less CGT when you sell all or part of your business. This means that financial gains from the sale of a trading business up to the value of £1 million are taxed at 10%, instead of at standard CGT rates. This applies to individuals who are registered employees or sole traders and have held shares for more than two years. The £1 million allowance is available per individual per lifetime for eligible transactions.
... and maximise private pension contributions
If you run your own business you may be able to decide how much to pay into a private pension. The maximum contribution which can attract tax relief (known as your annual allowance) is the lower of your income and £40,000, including tax relief on the contribution. This allowance reduces if your ‘adjusted annual income’ is more than £240,000, so you may choose to take a dividend that allows you to pay more into a pension pot.
However, remember that under some circumstances (detailed above), if your pension benefits have been accessed, the gross annual allowance will be reduced to £4,000.
If you are a shareholder, be aware that tax rates are increasing
Lastly, if you own shares in a company you may receive payments in the form of dividends. The tax rates on these payments is increasing by 1.25% across the board in tax year 2022/23. From April 2022, basic rate tax payers will be charged at a rate of 8.75% (instead of 7.5%) and higher rate dividend taxpayers will be charged at 33.75% (instead of 32.5%).
Additional rate taxpayers (those who have a taxable income over £150,000) will pay income tax at a rate of 39.35% instead of 38.1%. Your dividend allowance (the amount you can earn tax-free from dividends) will remain at £2,000.
Therefore, if you are a company director and usually pay yourself in dividends, it might be worth considering taking a larger dividend before the end of the tax year.
It is advisable to seek independent financial advice from a tax specialist before making financial decisions. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practice and can be subject to change.
The information contained in this publication does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors.
The value of your investments can go down as well as up and you may not get back the full amount invested. Your capital is at risk.