TAX EFFICIENT INVESTING
When it comes to investing, it's important to ensure your portfolio has been planned tax efficiently
The fundamental tax-efficient vehicles:
Pension Plans
- In terms of tax-efficiency, pensions are very difficult to better. You obtain tax relief on your contributions, even at the highest rate of tax, where, for example, if you’re a top-rate tax payer, for every £1,000 being added to your pension fund, you will only pay £600 (see at bottom)*.
ISA (Individual Savings Accounts)
- These are a retail investment arrangement available to residents of the United Kingdom. Payments made into these accounts are made after income has been taxed, but once inside this vehicle, this is a very tax efficient investment. The only downside is that there’s a restriction on the amount you can pay into these vehicles each year – known as your annual ISA allowance (which currently stands at £20,000 each year (as at July 2021 of this editorial, see here)).
Note – these two vehicles above need regular maintenance because monies going into these vehicles will be invested for growth/income and as such, investment fund choice and monitoring is of key importance over the long term to maximise the potential for gains.
Tax-efficient vehicles for experienced investors
EIS/SEIS
- These are UK tax reliefs that the Government introduced in 1994 which were designed to encourage capital investment into small unquoted companies in the United Kingdom for specific qualifying sectors. Investing in companies that are unquoted on the stock exchange means that there can be a high risk of capital loss. By providing highly beneficial tax incentives to investors, the Government hoped to mitigate some of the risk against potential gains.
VCT (Venture Capital Trusts)
- VCTs invest in other companies that mostly are unlisted on the London Stock Exchange. The general tendency is for VCTs to hold a minority stake in any business. They were introduced to provide venture capital for smaller companies looking to expand their business.
Note – because of the risks associated with EIS/SEIS/VCT we generally don’t advise on these unless the investor is both experienced and also has a portfolio large enough to be able to take these level of risks, and there also needs to be an appetite for risk too.
* Pension Plans – in order to achieve the £1,000 into your account from a £600 contribution, you pay a contribution net of basic rate tax, then you reclaim your high-rate tax through your tax return. We can arrange for this to be completed for you.