Make the most of your tax allowances

Make the most of your tax allowances

As well as deciding what to invest in, think about how you’ll hold your investments. Some types of tax-efficient account mean you can normally keep more of the returns you make. It’s always worth thinking about whether you’re making the most of your tax allowances too.

You need always to bear in mind that these tax rules can change at any time and the value of any particular tax treatment to you will depend on your individual circumstances.

ISAs

If you hold your investments in an Individual Savings Account – an ISA – you won’t pay Capital Gains Tax (CGT) Capital gains are profits you make when you sell an investment at a higher price than you paid for it. Every year, UK taxpayers have a CGT allowance, called the annual exempt amount. For 2015/2016, it’s £11,100. You’ll need to pay tax on any ‘chargeable gains’ you receive above this annual allowance.

The rate depends on your overall income, which includes any gains you make. The current rates are 18% for basic-rate taxpayers and 28% for higher-rate taxpayers.

Because the CGT allowance is set annually, many investors cash in their profits over time, rather than all in the same year. By doing this, they avoid going over their annual allowance and paying CGT. However, if you hold your investments in an ISA, you don’t need to do this because any gains made within the ISA are free from CGT.

It's always worth thinking about whether you’re making the most of your tax allowances when making your investment decisions. Remember too that tax treatment depends on your individual circumstances and you should seek independent taxation advice tailored to you.
on any returns your investments make. Interest and dividends are also exempt from Income Tax, although you can’t reclaim the tax credit on dividend income in an ISA.

There are two types of ISA – cash ISAs and stocks and shares ISAs, also known as Investment ISAs. You have an annual ISA allowance, which is the amount you can shelter from tax per year. Until recently you could hold up to half your allowance in cash and there were restrictions on transferring between the different types of ISA.

Cash Savings

Cash is a really important part of any portfolio. No matter what your goals are, it’s essential to have some cash tucked away for a rainy day or emergency. If you don’t, you could be forced to sell investments at a loss.

Cash isn’t risk free though. You'll get your money back but high inflation and low interest rates can eat into its buying power. For that reason, many investors make sure their cash earns as high a return as possible by using some of the products below.

Savings accounts

If you keep your money in a current account, chances are it’s not gaining much interest. It might not be earning anything at all. Transfer it over to a savings account and you’ll be able to earn a small amount of interest without tying up your money. You'll receive a better return on your money, but you may not have the same flexibility to withdraw it.

Cash Individual Savings Account (ISAs)

A cash ISA is a savings account that allows you to save your money and earn interest, free of UK Income Tax. You’re able to split your £15,240 between a cash and stocks and shares ISA.

What’s more, you  can  also  transfer amounts more flexibly between  a cash ISA and an investment ISA. You can also move payments made into ISAs in the current tax year, but in this case you need to move the entire contribution.

So if you’re looking for diversification or want to move away from investments at any point when markets are turbulent, you can.

If you already have enough cash savings tucked away to cover any emergencies, you might choose to invest the full allowance in an investment ISA. However, this type of ISA comes with the risk that you could get back less than you paid in.

If you decide a cash ISA is for you, there are lots of different types available. Some are completely flexible and let you take out your money at any time. Others offer higher rates of interest if you commit to saving for a set period. As with all investments, it’s worth doing your research before making your decision.

Term deposits

These usually offer a higher rate of interest than standard cash savings accounts. However, you have to agree to leave your money in for a fixed period of time. If you are allowed to withdraw your money early, you might have to pay a penalty.

Money market funds

These are not cash investments or savings accounts. They carry the risk of you losing your money. These funds aim to earn you a better return than bank interest rates. They do this by holding a mix of, for example, deposits and short-term securities that earn interest but can fall in value. They can earn you a better rate than cash savings accounts but returns aren't guaranteed and you could get back less than you invest. You might be required to defer withdrawals.


A secret to good cash management is knowing how long you can commit to saving. In general, the longer you’re willing to keep your money in one place, the higher your potential returns will be.


Using your ISA or pension to invest

 

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