As your career progresses, your income will increase and with that comes an added layer of complexity to your finances. Something that can make a huge difference when it comes to your wealth is considering tax-efficiency when you devise your investment plan. Of course, exactly what your plan will be depends on your individual priorities and goals. To learn more about how tax-efficient investing can benefit you, read on.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Maximise your allowances
The government offers a variety of allowances and relief on savings and investments to UK taxpayers, allowing you to reduce your overall tax bill and save money. Your first step should be to learn how to maximise your Individual Savings Accounts — every one available to you. With an ISA, you’re able to save up to £20,000 (as of the current tax year) in a tax-protected shelter.
Be sure to take advantage of all the types of ISAs available to you — Stocks & Shares, Cash, Lifetime, and, if applicable, Junior ISAs to get the full savings benefits.
Increase pension contributions
As of the current tax year, the maximum amount you can contribute to a pension is the lower of your gross earned income and £40,000. One thing to remember is that this number includes both employer and employee contributions and that exceeding the annual limit — unintentionally or not — comes with a charge on any excess that can’t be covered by carrying forward previous years unused contribution limits.
Remember, the more you earn, the lower your annual allowance will be thanks to tapering. However, maximising your pension contributions is still an incredibly effective way to save for retirement and save tax at the same time.
Capitalise on windfalls
If you ever come into some extra money or receive a pay raise or promotion, rather than blowing it all on a big purchase, think about increasing your pension contributions instead. Putting the extra money toward your future is making a smart financial decision and bettering your chances of a comfortable retirement.
Use your capital gains tax allowance
Capital gains tax (CGT) is tax paid on the profit received when you sell an asset that’s increased in value since purchase. If you’re thinking about selling an asset, such as a home, car, or even shares in a company, it’s important you’re aware of CGT. In the 2022/23 tax year, the annual tax-free allowance is £12,300, which means that you can make gains up to this amount without paying any CGT. The rate that you do end up paying is dependent on whether or not when you add the gains to your income it falls entirely or partly above the basic rate band.
You can offset losses against your gains and can carry forward any unused allowances to the next year, but as of the most recent Budget Statement, the exemption will be reduced to £6,000 in 2023/24 and £3,000 in 2024/25, so take advantage of the full allowance while you can.
Work with a professional
Working with an independent financial adviser, like the experts at Dental & Medical Financial Services is the best way to ensure your investment strategy, not only works for you, but does so tax-efficiently. For any questions, or if you’re ready to get help with your investment plan, get in contact today.