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A Guide to Tax Planning & Investment Returns

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.

Great financial planning isn’t just about creating a balanced investment portfolio which delivers long-term wealth growth. A good financial planner will also help you organise things in a way which helps ensure your investment returns are not eroded by unnecessary taxes. This isn’t as easy to do as it sounds, however.

Not only are there multiple different taxes to take into account, but you need to also consider how they interrelate and affect other aspects of your financial plan. Think of income tax and dividend tax as an example. Many business owners in 2019-20 think they can reduce their overall tax bill by reducing their salary and increasing their dividend income (since tax rates are lower for the latter). However, many people who do this might fail to realise that reducing their salary can affect their access to good mortgage deals in the future.

In this short article, our Castlegate financial advisers here in Grantham will be sharing some insights and ideas about how to improve your portfolio through prudent tax planning. Again, please note that this content is not financial advice and is for information purposes only. To deal with your financial plan and investments, please speak with an independent financial adviser:

01476 591022


Idea 1: ISAs

Individual Savings Accounts (ISAs) are a great place to start when looking at how to optimise a portfolio for tax purposes. In 2019-20, you are allowed to commit up to £20,000 per tax year into your Cash or Stocks & Shares ISA(s), and receive interest on the investments tax-free. The capital gains, income and dividends from within this “wrapper” are also free of tax.

Imagine, for instance, that you have £100,00 contained in an ordinary savings account. Also, let’s assume you earn 1.5% interest on your savings (a generous rate in today’s climate!). That should deliver a £1,500 return after 12 months. However, this isn’t as good as it might sound.

First of all, if inflation should hold at 2% during this period (i.e. the Bank of England’s target) then, in real terms, your £100,000 would be worth 0.5% less than 12 months ago. Not only that, however, but if you are a higher rate taxpayer, then any interest earned over £500 is likely to be taxed at 40%. In the above scenario, that could lead to £1,000 getting taxed at 40%!

However, by gradually moving some of this £100,000 into your ISA(s), you can at least “shield” up to £20,000 per tax year from this tax. To beat the eroding effects of inflation, however, you will likely need to speak to a financial adviser about how to generate a better return on your savings. For this, you might discuss different Stocks & Shares ISA options with them.


Idea 2: Pension Investments

You might already know that in 2019-20, you can put money into a pension and protect these contributions from income tax. Not only that, but the government will also effectively “top up” these contributions via tax relief at your highest rate of income tax. So, if you are a Basic Rate taxpayer the government should put £1 into your pension for every £5 you put in. For Higher Rate taxpayers, every £5 you contribute should receive a £2 “top-up” from the government.

For those using an investment portfolio for a future retirement fund, therefore, it can make a lot of sense to talk to your financial adviser about moving some of it into a pension. Let’s take the example above once more. If you have £100,000 in a regular savings account then you might think about putting this into a good private pension. In 2019-20 you are allowed to contribute up to £40,000 per tax year (or up to 100% of your salary – whichever is lower), although high earners may have their “annual allowance” restricted.



Idea 3: Tax-Efficient Investments

There are certain investments on the market which can offer significant tax benefits, perhaps because the UK government wants to stimulate economic growth in a particular sector. One notable example is the Enterprise Investment Scheme (EIS), which allows investors to provide funding for innovative UK startups whilst offering the potential to generate a tax-efficient investment return.

EIS schemes come with higher investment risks so it’s important to weigh up their place in your investment portfolio with your financial adviser. Assuming they are appropriate for your goals and risk appetite, however, then these can go a long way towards optimising your portfolio’s tax profile.

For instance, in 2019-20 you can invest up to £1m in EIS opportunities per tax year, and claim back up to 30% of the value of your investment in the form of income tax relief. So, if you invest £5,000 in a given tax year, then you should be able to claim back £1,500 from your income tax bill. Not only that, but EIS investments can also benefit from “loss relief”. This means that should your EIS investment fail, then you can claim back the value of your investment against your highest rate of income tax. Furthermore, you can defer capital gains tax due by reinvesting such gains into EISs.

So, imagine you invest £20,000 into EIS opportunities in a tax year. £6,000 should already be off-set against your income tax bill, so your “at-risk capital” is, in fact, £14,000. If all of your EIS investments were to fail (extremely unlucky!), then you could claim back 45% via “loss relief” if you are an Additional Rate taxpayer. In effect, that would mean that you “only lose” £7,700, rather than all of it.



If you are interested in discussing your own financial plans or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 591022