Chancellor Jeremy Hunt’s spring Budget, due on Wednesday 15 March, will bring with it a series of changes affecting all areas of the country as the government look to pool together extra funds.
For investors, two of the most important taxes are on capital gains and dividends.
Currently, any profits made from an investment -whether it be stocks, crypto or ETFs- are liable to taxation called capital gains tax.
The government currently offer £12,300 as a tax-free allowance for profits made from investing.
Yet, on 6 April, it will fall to £6,000 before being cut by half to £3.000 a year later.
There is also currently a £2,000 tax-free limit on earnings from dividends, but that too is set to fall- to £1,000 this year and £500 in 2024.
Dividend tax can take anywhere between 8.75% and 39.55% of payments, dependent on which tax bracket you fall into.
Individual savings account (ISA)
With all these changes due that’s where an ISA comes in handy.
An ISA account allows you to deposit up to £20,000 in cash, shares, stocks, and other investments without any of the gains or income being taxed.
Therefore, the most common approach is to put the investments most liable to taxation into these accounts, often with the highest-yielding ventures going into the account first.
It can also be more beneficial to target income-based investments for ISAs rather than growth funds, suggest experts.
“Holding investments targeting capital growth rather than income in an Isa may be less efficient because crystallised gains are taxed at lower rates and capital losses can often be offset by gains,” said Luke Ashton at private investment firm Brooks Macdonald.
Bed and ISA
An additional strategy that many firms offer is called a ‘Bed and ISA’.
This is the process of selling an investment, crystalising profits within the capital gains tax allowance, and then repurchasing this investment in the ISA.
This will allow you to avoid taxation on the investment without having to relinquish holdings and protects the security for the future.
However, those wishing to use the process are required to do so soon, as it can often take longer to open than a normal ISA.
Flexible ISA
The ‘flexible ISA’ can provide further ease for investors, with it allowing people to withdraw funds from the account and then return them within the same tax year without affecting the £20k allowance.
“Let’s say you currently have £50,000 in your ISA accumulated from previous tax years. If you then withdraw £10,000, you can pay this back into the ISA during this tax year and still use your full allowance before 5 April 2023,” said Rob Morgan at investment firm Charles Stanley (LSE:CAY).
It is even possible to withdraw hundreds of thousands from this account without effect if it is returned by the end of the tax year.
The flexible ISA also allows for dividend payments to be withdrawn and returned to an ISA without affecting allowance.
Rob Morgan added: “Bear in mind that you can’t subscribe to more than one of the same type of ISA in a single tax year, and you can only repay withdrawals to the same ISA they were taken from.”