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Simple ways to stay tax smart

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

Keeping the tax you pay to a minimum is one way of making the most of your returns. Here are some useful ways to stay tax-efficient during the current tax year.

Click to toggle accordion What you'll learn:

How to protect your savings from income and Capital Gains Tax (CGT) charges.

When the taxman will top-up your pension savings.

Which tax breaks will cut the tax bills on your investments.

Savings and investments are subject to tax, which can have a big impact on your returns. The good news is there are plenty of ways you can bring your tax liabilities down by making sure you take advantage of the tax allowances the Government gives you each tax year. Many of these will be lost to you for good if they go unused by the end of the tax year on 5 April, so it’s well worth exploring what’s available.

It’s important to appreciate, though, that tax rules can change in the future and their effects on you will depend on your individual circumstances.

Making the most of your ISA allowance

Each tax year you can invest or save a set amount into tax-efficient Individual Savings Accounts (ISAs).

In the 2017-18 tax year, you can put up to £20,000 into ISAs.You can split your allowance between a cash, investment, innovative finance and a lifetime ISA.1 However, with a lifetime ISA, you can only pay in up to £4,000 of your £20,000 allowance. But, you can only pay into one of each type of ISA in each tax year.

You won’t pay income tax, tax on dividends or Capital Gains Tax (CGT) on any investments you hold in an ISA, so it’s worth trying to use up your ISA allowance each tax year. If you invest outside an ISA, any profits made above the annual CGT allowance, which for the 2017-18 tax year is expected to be £11,300, are subject to tax at 10% or 20% depending on your tax band. When you invest in an ISA, even if the profit you make is above this £11,300 threshold, you won’t have to pay CGT.

Similarly, the first £5,000 of dividends earned from investments held outside an ISA are tax-free, but if you exceed this threshold, you will be taxed at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Dividends received on shares held in an ISA are tax-free.

The Chancellor of the Exchequer Philip Hammond announced in the March 2017 Budget that the £5,000 dividend allowance will reduce to £2,000 with effect from April 2018. This means that tax-efficient wrappers such as ISAs will become more important for investors seeking to reduce their increased tax exposure, as dividends received on shares held in an ISA are tax-free.

Use your new ISA allowance

It’s a new tax year and you’ve got a new ISA allowance to use. You could invest up to £20,000 tax-efficiently in a Barclays Investment ISA.

Investment ISA
Remember, the value of investments can fall as well as rise, and you could get back less than you invest.
Tax rules can change in future. Their effects on you will depend on your individual circumstances.

Changes to tax on interest earned outside an ISA, which came into effect on April 6, 2016, may influence the decision for many on whether to hold cash inside or outside of an ISA.  Basic rate tax payers now have an annual tax-free personal savings allowance of £1,000 and higher rate tax payers a £500 allowance, which could see ISAs only being attractive for those with savings income in excess of these allowances.

Even if you have no income tax liability at the moment and large capital gains aren't likely any time soon, it's still worth thinking about holding your investments inside an ISA.

Building up your portfolio inside an ISA will shelter you from having to start paying tax on it later if your tax position changes. If you don’t use your full allowance in the tax year, you can’t carry any unused allowances over into the next tax year.

However, ISAs (except for lifetime ISAs) are now more flexible than ever, so it is possible to withdraw cash from your ISA and put it back within the same tax year without this counting towards your ISA subscription limit for that year. Not all ISA providers may offer this flexibility though, so check with your provider before withdrawing any money. Good record-keeping of annual withdrawals and payments-in are strongly recommended.

Investment ISA holders can use existing assets to fund their ISAs and capitalise on their Capital Gains Tax (CGT) allowance using a technique known as ‘Bed & ISA’. It works like this. You sell enough shares to realise sufficient cash to fund your remaining ISA allowance. This money it then transferred into your investment ISA where the same shares are repurchased. You can Bed & ISA an investment in funds as well – such as unit trusts, investment trusts and Exchange Traded Funds (ETFs).

The Bed & ISA tax tool works particularly well for those with substantial shareholdings outside an ISA and means you’ll have successfully moved this portion of your investments into a tax shelter for future CGT savings.

To fully appreciate if this is something you should be doing, talk over your situation with a tax adviser.

Reduce your taxable income with a pension

ISAs offer favourable tax treatment once your money is in the account. But they don’t help you cut your immediate income tax bill, because your contributions still come out of taxable income. If you want to reduce the amount of today’s income that you’re losing to tax, you could consider paying into a pension, like a workplace pension for example, or a SIPP (Self-Invested Personal Pension).

When you make contributions to a pension you get tax relief from the Government. If you’re a basic rate taxpayer you’ll receive tax relief of 20% on your contributions, so if you pay £8,000 into a pension, you’ll get a further £2,000 added through tax relief. If you’re a higher rate taxpayer, you can reclaim an additional £2,000. In other words, you’d pay a net £6,000 out of your after-tax income and end up with £10,000 in your pension pot.

You can only receive tax relief on up to £40,000 of pension contribution each year, or 100% of your earnings, whichever is lower. This includes all contributions you make into other pension plans, such as a company pension scheme and any that an employer, or anyone else, makes for your benefit.

The rules changed in April 2016 if your adjusted earnings are greater than £150,000. You now lose £1 of tax relief for every £2 you earn over £150,000, up to a maximum of £30,000. This means if you earn £210,000 or more, your annual allowance will drop to £10,000. This could apply to higher rate taxpayers as well as additional rate taxpayers. Adjusted income includes both personal and employer contributions. So if you earn more than £110,000 and you contribute the full allowance of £40,000, you might be affected.

Also, anyone who has drawn more than their tax free lump sum from their pension will have the amount that they can contribute to a pension reduced to £4,000 or 100% of earnings, whichever is lower, as their annual allowance is replaced by Money Purchase Annual Allowance.

Bear in mind that with any pension, the investment will be locked away until you’re at least 55 (rising to 57 by 2028, and possibly older after that). Also, when you’re able to access it again, most of it may have to be taken as taxable income.

Remember, tax rules can change and this could affect both your future opportunities and existing arrangements. Tax treatment depends on individual circumstances. You might want to get professional advice to help you become more tax-efficient with your investments.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

Barclays Investment ISA

Take advantage of tax-efficient investing with a Barclays Investment ISA and enjoy a cutting-edge service that makes investing easy.

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1 Barclays does not offer an innovative finance ISA or a lifetime ISA