Many people find it difficult to save more than £20,000 per year, or £40,000 for a couple, with the individual savings account (ISA) allowance now at £20,000.
However, you may receive an inheritance, a lump sum payout from a pension, or an unexpectedly significant redundancy payment when an investment matures or you receive an inheritance. When money becomes available outside of your ISA allowance, you may need to consider investing directly in funds or other products.
These non-ISA investments are frequently held in a ‘general investment account’ on investment platforms.
ISAs are tax-favoured tax shelters; the monies they contain are exempt from UK tax on both investment income and capital gains. Outside of the ISA, there may be tax charges, although they may not be as severe as you may imagine, depending on your circumstances. The primary taxes are:
The revenue generated by your non-ISA investments is subject to income tax. Interest on bond investments (fixed interest) and cash, as well as dividends on equity investments, generate this income (stocks and shares). Savings income is taxed on income from investments like cash deposits and bond funds. Where non-dividend and non-savings income is less than £17,570, investors may be eligible for the personal savings allowance of £1,000 (£500 for higher rate taxpayers) and maybe even the 0% starting rate of tax of up to £5,000.
In 2021/22, the first £2,000 in dividends is covered by a dividend allowance, which is taxed at 0%. For basic rate taxpayers, the surplus is taxable at 7.5 percent, 32.5 percent for higher rate taxpayers, and 38.1 percent for additional rate taxpayers.
The capital gains you make are subject to capital gains tax (CGT). CGT is a tax that can be managed to achieve optimum tax efficiency. Because tax is only due when units or shares are sold and a profit is made, this is the case. You have an annual CGT exempt amount of £12,300, which means you only pay tax on gains on money beyond that amount (at 10% or 20% if you are a higher rate taxpayer). Gains on real estate are taxed at an additional 8%.
One alternative is to rebalance your non-ISA investment portfolio at least once a year. Many investors utilise their annual ISA allowance by selling investments and reinvesting the proceeds in their ISAs. This way, you can frequently realise relatively tiny gains that may be totally or partially exempt from CGT for the year (£12,300). This eliminates the chance of taxable profits accumulating and posing an issue in the future if you wish to take a big sum from your portfolio. With the ISA allowance remaining at £20,000, it won’t be long until you’re transferring your directly held investments into your tax-free ISA account. Meanwhile, with caution, the tax you must pay on these other investments can be successfully controlled.
Please contact us if you’d like to speak with a member of our financial counselling team about your financial position.
The value of tax reduction is determined by your specific circumstances. Tax advice is not regulated by the Financial Conduct Authority, and tax regulations are subject to change.
Your investment’s value might fall as well as rise, and you may not get back the full amount you put in.
Past performance is not a good predictor of future results. Investing in stocks should be viewed as a long-term investment that fits with your entire risk tolerance and financial situation.