I’ve Hit My ISA Allocation Limit - How Else Can I Reduce My Investing Tax Bill?

8th Mar '23 by Megan Boxall

17 comments 2495 reads

The biggest advantage of investing in an ISA is the tax relief. Any returns you make on your investments are tax-free. This means no income, capital gains, or dividend tax on any of the returns in your account. And the savings from that tax bill can be significant - as we noted in our recent ISA guide, an investor who used their full ISA allowance every year between 2010 and 2020 to buy a US tracker fund could have amassed tax free profits of £149,160.

But what if you want to invest a greater sum than the annual ISA allowance (capped at £20,000 in 2022/23)? Any additional investment will need to be put into a different account, where it may not be sheltered from the tax man.

Fear of a tax bill shouldn’t put you off investing more of your savings, especially if you think market conditions are ripe. There are still ways of reducing your annual tax bill, whether that is by using other tax wrappers offered to British investors, or by making full use of your tax-free allowances.

This article will show you how to:

Make the most of your personal allowance to reduce your tax bill for capital gains in a general investment account
Make the most of your spouse’s allowance
Make the most of your workplace pension
Contribute to other tax efficient wrappers

How to use your personal allowance to reduce the tax bill for investments outside an ISA

General Investment Accounts (GIA) are often the first port of call for new investors. They’re simple, flexible and allow you to withdraw the money whenever you want. But while opening a GIA before an ISA is a mistake (for the tax reasons discussed above), that shouldn’t stop you from using a GIA for additional savings or investments in exotic markets not permitted by the ISA wrapper.

And just because your investments are in a GIA rather than an ISA doesn’t mean you can’t be canny about your tax payments.

Just like the annual ISA allowance, everyone in the UK has a personal allowance for tax-free capital gains and dividends (these are laid out in the table below alongside the tax rate for capital gains and dividends above the personal allowance).

Personal Allowance

Basic Rate

Higher…

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MiserableJacktPotato

8th Mar '23

You've got roughly 28 days left of that capital gains tax allowance. The allowance gets cut massively from 6th April 2023 to £6000 and gets cut again 6th April 2024 to £3000. Ditto the dividend allowance which will be £1000 from 6th Aril 2023 and £500 from 6th April 2024.

And, in the UK, pension savings aren't free of tax once you cross certain thresholds. I'm no expert but my understanding is there's an annual contribution limit and a lifetime allowance that makes no allowance for successful investments.

This article is effectively out of date even though it was only published this morning.

Happy to be corrected if I have this wrong, we're all here to learn :)

XTR

What about spread bet accounts? They are tax free, offer long or short positions & leverage options, huge choice of stocks, commodities, ETFs etc.

Rusty2

Yes, good point. I thought they would have been covered.

Quest

Invest long term in good Investment Trusts. They can switch investments without incurring CGT. Then hope annual CGT allowances are increased and perhaps that gains are indexed.

Gora

Can you buy stocks in a limited company? Can you also recommend a provider for this.

Hope.

Not a great investment strategy.

At some point though, something has to give as the UK falls further behind as a place to invest. I won't post my full thoughts as we're not supposed to discuss politics here, but the govt needs to accept reality at some point.

I looked into this recently, IG seemed like the best option although you have to provide a lot of documentation, some of it neither me or my accountant recognised.

Mike888

The issue with buying stocks within a ltd company is the tax, you will pay corporation tax on gains (now likely to go up) and then you will pay tax on withdrawals from your company, either through salary or the dividends you pay yourself. A double tax hit and not a small one either. At least that was the conclusion I came to when I considered it previously

Also be wary of whether it changes what your company is stated as doing when you incorporated it.

Timoteo

Spread BET. There’s the clue right there ! You have to cover any position with cash, and if it breaks your stop, up or down, you lose the entire position. There is also a spread which can be quite large and there is a limit to how much you can put on any stop position. Yes, you can make money that way - especially by riding a trend - but essentially you are taking a leveraged position on a stock with all the risks rewards that that entails. Not relevant to the subject Megan is covering here - a totally different instrument.

I agrée. It might have been posted this morning but it must have been written a while ago !

Yes spread bet is a good tax-free approach, albeit with leverage risk, exaggerated gapping, overnight funding, and it is very unlikely to be a 100% reflection of the underlying stock price, ie your SB buy/sell price will be higher/lower than your stock price. Equally don't underestimate the heightened anxiety of a SB position vs a stock position,

CFD's have similar leverage to SB's but are taxed, their price will, however, reflect the underlying market. The advantage of CFD's are that losses can be offset against capital gains, DYOR on this.

No mention of the tax advantages of VCT's

surprised that Stocko has run this article tbh as it doesn't really fit with what the platform provides and is not entirely accurate.

eg the SIPP comments are a little misleading :

The government "gives" 20% contribution to what you put into the SIPP. If you are a higher taxpayer you can "claim" tax back for the remaining to either 40% or 45% depending on your tax threshold via self-assessment. This doesn't happen automatically, also this money additional to the 20% doesn't end up in your SIPP, you get a tax rebate.

Watch your tax code notifications from HMRC, often they make an assumption that what you did in one year you will do again for future years and they make pro-active adjustments to your tax code. If you don't do what you did in previous years you will have underpaid tax, again a nasty tax bill you weren't expecting

Although you can contribute up to £40k per year you need to potentially consider what is being contributed by your employer else you may accidentally exceed your threshold, and then you get another nasty tax bill you were not expecting.

There is also a lifetime allowance which you cannot exceed, ditto nasty tax bill if you do.

DYOR please though

Chris Brown

I think most people don't fully appreciate the tax benefits associated with pensions. Every £80 paid into a pension becomes £100 through the addition of basic-rate tax relief (a 25% uplift). Assuming no investment growth, you can take out 25% tax free with the remainder subject to income tax. So from your £100 pot, you could get back £25 + (£75 * (1-20%)) = £85. Your £80 has turned into £85 for a 6.25% return, all else equal.

The return is fantastic if you are a higher-rate taxpayer when contributing, but a basic-rate taxpayer in retirement. Your £80 contribution becomes £100 in the pension, but you save another 20% through your self-assessment tax return. So the £100 pension fund only 'costs' £60 in the end. If you are a basic-rate taxpayer when retired, the £85 net you receive from your pension is then an effective 41.66% return on the cost of your contribution. Even if you remain a higher-rate taxpayer in retirement, you get back £70 net for a 16.66% return just through the tax structure. The return profiles are more beneficial again for Additional Rate Taxpayers. And everything is supercharged from a personal perspective if receiving employer contributions on top!

If your earnings are between £100k-£125k you can get back some or all of your personal allowance through pension contributions. You can also get back the extra 1% tax rates in Scotland, on your contribution amount.

Pensions are exempt from Inheritance Tax, while the other mainstream wrappers fall within your taxable estate (unless in trust, and I'm not counting EIS as mainstream). If you die before 75, your nominated pension beneficiaries can keep the money invested as a nominee pension and withdraw money whenever they want (regardless of their age) completely tax free. So long as the pension provider includes this feature.

The trouble, of course, is you can't access pensions until age 55, with the Normal Minimum Pension Age increasing to age 57 in 2028. However, your existing pension may benefit from a protected age of 55. The government could also change the regulations and tax rates in future. And there are a myriad of complex rules on both accumulation and decumulation, including the Annual Allowance, Tapered Annual Allowance, Carry Forward, Lifetime Allowance, Money Purchase Annual Allowance and Recycling Rules. Emergency Tax is usually applied to one-off withdrawals, which then needs to be reclaimed, making pensions rather cumbersome if you are looking to fund a one-off expense.

The article doesn't mention onshore and offshore investment bonds which are very useful in certain situations. But the tax position on withdrawals is complex - and quite punitive for large withdrawals - if investment gains are made.

I would suggest that anyone who wants to explore the tax benefits of different wrappers seeks Independent Financial Advice. The Unbiased and Vouched For websites can point you in the right direction. This post, of course, is not itself advice!

andrewjames

10th Mar '23

As one other poster has noted, the absence of any comment on VCTs is surprising, to say the least, particularly as EIS and SEIS (both even more risky, in my view) are both mentioned.

13th Mar '23

Don't get hung up on the semantics, calling it a bet is what makes it tax free and the risk is identical to buying a stock. Breaking a stop level will close out a position, same as it would in an ISA, isn't that the point? The extra spread and funding is roughly equivalent to commission/stamp duty, and as long as you have enough funds in your account to cover your collective positions, you're not using leverage. Spread betting is highly relevant to the article's subject of tax reduction because it offers exposure to a huge range of markets, long or short without paying a bean in tax.

I’ve hit my ISA allocation limit - how else can I reduce my investing tax bill?

How to use your personal allowance to reduce the tax bill for investments outside an ISA

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Megan Boxall

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