A guide to Tax efficient Investing
Individual Savings Account (ISA)
Every adult in the United Kingdom has a £20,000 ISA allowance for 2020/2021. This means you can invest up to £20,000 per tax year without paying a penny in Income Tax on the interest or dividends you receive, or Capital Gains Tax on gains made in a Stocks & Shares ISA.
There are four main types of ISA to choose from:
In order to encourage people to invest in private pension schemes, the government offers tax relief, making a pension a highly tax-efficient investment vehicle.
Tax relief is calculated based on your highest rate of income tax: for a basic-rate taxpayer, tax relief is 20%; for a higher-rate taxpayer, tax relief is 40%; and for an additional-rate taxpayer, tax relief is 45%. For example, it would cost £80 for a basic-rate taxpayer to contribute £100 into their pension.
Your pension fund will also grow tax free.
Higher Risk Investment
If you are willing to consider higher-risk investments – perhaps if you have used up your ISA allowance and are already making private pension contributions – you might consider investing into a venture capital scheme.
In order to encourage people to invest in companies and social enterprises that aren’t listed on a recognised stock exchange, the government offers significant Income Tax and Capital Gains Tax relief to investors who invest into the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) or a social enterprise.