Tax is a hot topic right now. Like me, you may be someone who is preparing to get their return into HMRC before the 31 January deadline. I chatted with Albert Soleiman, head of CMC Invest, to get some top tax and money-saving tips for ISA and non-ISA investors.
#1: Know your allowances!
Soleiman explains that the key to tax-efficient investing is to know how much you can spend before tax kicks in. “The first thing I’d recommend is to make sure you know what allowances exist and to use them. You have to be aware that you’ve got your dividend allowance and your capital gains tax (CGT) allowance”.
He warns that investors need to be especially mindful of this as the government gradually slashes these annual allowances.
The current CGT allowance of £12,300 for individuals and personal representatives will more than halve to £6,000 from April 2023. It will then drop to £3,000 in the 2024 tax year. Tax is paid on any capital gains above these thresholds when an investment is sold.
The dividend allowance of £2,000, meanwhile, is scheduled to drop to £1,000 next year. It will then fall to £500 in 2024’s tax year.
#2: Remember that some ISAs can be inflexible
Individual savings accounts (or ISAs) are popular investment vehicles today.
These tax wrappers come in various forms and include Cash ISAs, Stocks & Shares ISAs, and Lifetime ISAs. And they mean that investors can invest up to £20,000 each tax year without having to pay any tax.
But rules over withdrawals mean they have one major drawback, Soleiman says. If I deposit £20,000 in a tax year and then withdraw £5,000, I can’t reinvest that £5,000 until the next tax year. This applies to all ISAs aside from flexible ones.
This is where investing outside a standard ISA has an advantage. Soleiman notes that, “If you sell an asset outside a tax wrapper you can save up again and buy that asset again without having lost your allowance”.
He adds, “You have got maximum flexibility, and if your capital gains and income are below those dividend and CGT allowance thresholds you’ve got no tax to worry about”.
#3: Beware of Lifetime ISA losses
Lifetime ISAs are savings and share investment vehicles that people can put money into between the ages of 18 and 50. Investors have a maximum yearly allowance of £4,000, and the government will add a 25% bonus to what is added. Someone who meets this limit will therefore have their holdings boosted by £1,000 in a tax year, to £5,000.
Soleiman says, “This is a terrific product if you’re in that age bracket”. But he warns that withdrawing from Lifetime ISAs can end up costing an investor money.
The CMC Invest head says that “If you withdraw your money the government won’t take their contribution back. They would instead take 25% of the total amount, not just what they contributed”.
This means someone who withdrew £5,000 from their Lifetime ISA would have £1,250 taken by the government.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
