Steps to minimise your UK income tax bill through efficient investing


Introduction

If you are living in the UK, there are various UK tax efficient investing options available to you. These options provide legal ways to minimise UK tax exposure on your investments in the present and future.

1. Pension contributions

A pension fund is essentially a ‘money box’ into which an individual makes contributions which they can draw on during retirement.

Registered pension funds themselves are not charged to income tax or capital gains tax, and a member of a scheme can withdraw up to 25% of the capital value on retirement completely tax free.

However, the main reason that pension funds are popular is that taxpayers receive a measure of tax relief every time they make a contribution to a registered scheme.

Tax relief is obtained in one of two ways:

1. By relief at source; or
2. Under net pay arrangement.

Under the relief at source rules, payments to a pension scheme are made net of 20% tax. This means that if you want £1,000 to go into your pension fund, you will contribute £800 and HMRC will contribute £200. If you are a higher or additional rate tax payer, extra tax relief is given on your contributions by extending the basic and higher rate limits.

Under the net pay arrangement, payments to a pension scheme are pre-tax. This means your net pay – i.e. gross pay less pension contribution – is subject to tax.

In addition, if your employer makes a contribution to your pension scheme, this is a tax-free benefit.

Your total pension input (including your employers contribution) is restricted by the annual allowance which is currently £60,000. Note that your annual allowance will be tapered if you are considered a ‘high earner’.

Overall, contributions to pension schemes will reduce your tax bill in real time and your investments will grow tax free.

2. Individual savings accounts (ISAs)

Individual savings accounts (ISAs) are tax-favoured funds in which you can hold a range of different investments. You can invest up to £20,000 per tax year into an ISA.

The main benefits of the ISA are as follows:

– Incomes generated within the ISA are exempt from taxation; and
– Gains generated within the ISA are exempt from taxation; and
– There is no minimum lock in period; and
– Withdrawals can be made anytime.

The ISA wrapper is extremely tax efficient and flexible and thus, as a first point of call, if you are going to make investments in the UK, you should ensure that the investments are structured within an ISA wrapper.

3. Premium bonds

You can hold up to £50,000 in Premium Bonds, with a minimum investment of £25. Premium Bonds do not guarantee any rate of return at all. A Premium Bond simply buys a ticket in a monthly raffle. There is a prize draw every month, and only if your Premium Bond-holder’s numbers are drawn, you will win a cash prize. The monthly prizes range from £25 to £1 million.

All prizes are tax free and you are free to encash your premium bonds at any time and have your investment returned.

4. Utilising allowances

Outside of tax efficient investment strategies/wrappers, the UK also provides taxpayers with tax free allowances that are re-set on a yearly basis as follows:

– bank interest allowance of up to £1,000; and
– dividend allowance of £1,000 (reducing to £500 from 6 April 2024); and
– capital gains exempt amount of £6,000 (reducing to £3,000 from 6 April 2024).

Therefore, if you have investments that generate incomes and gains outside of tax efficient structures, there are a number of 0% tax free allowances to utilise against these incomes and gains.

5. Spousal transfers

Providing one spouse earns less than the other or one spouse is not utilising their tax-free allowances, assets can be transferred between spouses, free of tax implications. This will ensure allowances are utilised and incomes and gains are charged to tax at lower tax rates.

How can GTC help?

GTC can assess your ‘wealth’ landscape and recommend actions to take to reduce or optimise your tax bill through UK tax efficient investing.

Become a GTC client

Book a free discovery call with our team. We will collect background information to develop a greater understanding of the necessary steps to take to optimise your taxes.


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