Having been one of those people frantically trying to use up my ISA allowance before the end of the tax year one too many times, I’m not going to admonish anyone who came to regret April 5th being on a beautiful Bank Holiday. I hope you all got to use this most useful tax shelter to the maximum.
It’s perhaps not regarded as the most gripping of topics, but tax mitigation very much should be given due attention. In fact, saving as much as you possibly can on tax should be absolutely as high a priority on your wealth management agenda as maximising your investment returns and minimising fees.
At the risk of sounding like a broken record, your ISA really is a must-use tax shelter. You can shelter up to £20,000 from tax on savings and investment gains a year currently (and £9,000 per child), which means that many people are seeing their ISAs as a serious alternative means of saving for retirement as well as a core investment method generally.
Get ahead of the ISA game
If the last-minute ISA scramble is a familiar scenario to you, then scheduling your next contribution might be a good idea. An even better one might be using up your annual allowance as soon as the tax year begins.
Even if you can’t decide how to invest immediately, you can put that cash away in a stocks and shares ISA for deployment at a later date. Feeding money into the markets in regular tranches is considered an efficient way to ramp up exposure while smoothing over volatility, anyway.
One of the reasons ISAs are being seen as a serious pension savings tool is that more and more people are realising that they are in real danger of exceeding the lifetime pension contribution allowance (LTA) of £1,073,100, particularly if they are a young higher earner. The magic of compound growth means that the final stretch towards that amount can come around a lot quicker than you might think.
Pensions remain paramount
Much has been said on how the freeze on the annual pension contribution allowance at £40,000, the LTA and indeed the higher-rate tax band will result in increases in reality as fiscal drag brings more and more people into the net.
However, this should not dampen enthusiasm for pensions as a route for tax-advantaged long-term savings. When you pay into your pension, you receive relief on those contributions at the highest rate of income tax you pay (up to your annual earnings or allowance, whichever is lower). What’s more, you get these reliefs applied pretty much automatically.
There are numerous other routes for the tax-conscious investor to consider.
You can access optimal exposure to investments from a tax perspective by exploring different types of instruments (and holding structures) with your wealth manager. Portfolios can be run in very tax-conscious ways but bear in mind that the best tax planning is long term, particularly if investment strategies are running alongside.
There are also various types of tax-advantaged investments to explore if you are comfortable with the higher risk-return profile associated with backing smaller companies.
You can invest up to £200,000 each tax year in VCTs and get 30% income tax relief up front, as long as you hold them for five years. You can then enjoy tax-free dividends and capital gains on top.
You can also get 30% income tax relief on EIS investments up to £1m in each tax year. When held for three years, EIS gains can be CGT free and you can defer payment of CGT charges on other assets by reinvesting into EIS. You can even offset EIS losses against previous years’ income tax charges.
As you can see, making tax savings extends from the basics up to ninja levels where every angle is covered throughout a unified investment strategy and financial plan. Whatever level you are currently at, make saving not settling your mantra. This can be the year you turn over a new leaf on tax!