Maximise your tax efficiency: Key investment options to consider before the Budget
Rachel Reeves’s first budget is just days away and if you are a high earner, you will be increasingly concerned that your invested wealth is now firmly in the Chancellor’s tax raising sights.
The new government has confirmed that it will honour their manifesto pledge to leave the traditional “working” taxes of Income tax, VAT and National Insurance at their current levels. This leaves Ms Reeves with a far smaller tax pond in which to fish especially if she is to make any impact on reducing the £22Bn Treasury black hole that she has claimed to inherit.
And that pond is almost exclusively stocked with the wealth of investors.
Dividend tax has already been increased for many.
And previous changes to stamp duty and mortgage interest relief have made it much harder to profit from the hugely popular buy-to-let property market.
Your annual Capital Gains Tax allowance has been cut to £3,000 for 2024/25. That is down by £9,300 in just 4 years.
The current individual Inheritance tax threshold has been frozen at £325,000 since April 2009. If that threshold had increased each year in line with inflation it would have risen to £503,000 today. That is a sobering thought for families now facing an IHT liability.
The most recent figures supplied by HMRC have confirmed that inheritance tax raised £5.99Bn in 2021/2022 therefore it’s highly unlikely we will see an increase in the threshold anytime soon. The current additional allowance (raising the threshold to £500,000) when you pass your family home to children or grandchildren may also be an easy target for removal by the chancellor.
Taxing wealth was also a tactic of the last government but it is much more of a threat under Labour given their imposed barrier to more traditional tax raising options.
As budget day fast approaches, we thought it might prove helpful to you to provide a checklist of the most popular tax efficient investment options. This checklist could also prove to be the ones under threat in the budget.
Assuming the checklist items survive this weeks budget, there may still be time for you to maximise your current allowances before the tax year end.
- Individual savings accounts (ISAs): You can save a maximum of £20,000 this tax year without paying any tax on growth or income.
- Pensions: Tax relief is available at your highest marginal rate on contributions up to 100% of your annual earnings ( subject to a maximum of £60,000 a year). .Pension funds grow largely tax free.
- Junior ISA: If you are a parent or guardian you can invest in a stocks and shares and /or cash ISA for a child under age 18. The limit is £9,000 annually and once opened other family members and friends can add to it within that limit. No tax is paid on any growth or interest.
- Junior SIPP: Parents can pay up to £3,600 each year into a pension for their child (including tax relief). Once set up grandparents can also contribute, subject to the maximum. Like all private pensions the fund is sheltered, in the main, from dividend and capital gains tax.
- Premium bonds: Investors can hold up to £50,000 in premium bonds where any prizes won each month are paid tax free.
- AIM investment: Worth considering for experienced investors concerned about their IHT liability are unquoted AIM shares.
- Venture capital trusts (VCTs): These are investment companies which carry a higher risk than most other investments as they are limited to small companies with high growth potential. Investors benefit from a 30% upfront tax relief (up to a maximum investment of £200,000 a year). They must be held for a minimum of 5 years but then dividends are tax free, and growth is also free from capital gains tax.
- Enterprise Investment Schemes (EIS): These are similar to VCTs in that 30% upfront tax relief is available. The difference is that these schemes are designed to offer smaller and higher risk companies access to finance. Tax relief is available up to £1m invested. Investment must be held for three years. Given the considerable risks involved this is an investment class where professional independent advice is essential.
Of course all of this could change in the October budget and professional advice should always be sought.
