Two ways to invest tax free
Each year, the Government gives savers tools to help them save on tax. Incorporating them into your investments can be an easy way to help.
Individual Savings Accounts (ISAs)
Every year the Government gives everyone a tax-free ISA allowance. Filling up your annual ISA allowance is a must as far as savings goes, to ensure you maximise the tax-free opportunities. For 2017/18 the allowance stands at £20,000, which means we can shelter a lump sum from capital gains and income tax.
However, it's important to know that ISAs don't offer complete tax-free status for all. Income from corporate bonds and gifts (and cash) is tax free. But income from equities can attract some tax charges, as income is taxed at source. Taxpayers can cross into higher tax brackets, so placing investments in a tax-free wrapper is a smart move. Investing in an ISA also means you don't have to mention it on your tax return.
Not everyone can afford to save the full ISA allowance each year, but putting a little something away every month is better than doing nothing, especially if you start to build up your contribution over time.
Self-Invested Personal Pension (SIPP)
Your income-generating funds might also be placed in another very tax efficient wrapper for retirement – a personal pension or self-invested personal pension (SIPP). The tax treatment when you start taking income from pension savings is slightly different because savers receive tax relief on the way in – it is on the way out where HM Revenue & Customs takes a slice.
You get a tax top-up when you contribute to your retirement pot, at the rate of 20%, 40% or 45%. So, every £800 paid in by a basic rate taxpayer, for example, will automatically turn into £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form boosting their return even higher. To access your fund you need to remove your money from its tax-free wrapper. From age 55, you can usually take up to 25% tax-free cash from your SIPP and a taxable income from the rest.