Whatever your financial goals might be, the ultimate aim is to grow your wealth so that you can enjoy it and pass it on. As your life changes over time, it’s important to ensure that your financial objectives continue to meet your requirements.

There are many different tax-efficient ways to grow your wealth. We can help you understand the choices and make the investment decisions that are right for you. This will depend on your life priorities, your goals and your attitude to risk.

 

Tax on investments

The type and amount of tax payable will depend on the nature of your investments and on your income level. For higher rate and additional rate taxpayers, returns from investments can be subject to significant taxes in the form of income tax, capital gains tax (CGT) or both. CGT is a tax on the gain or profit you make when you sell something that you own, such as shares or property. This tax year there is a tax-free allowance worth £10,600 for each individual, so you’ll only be charged CGT for gains on assets above this level. CGT rates are 18 per cent for basic rate taxpayers and 28 per cent for higher and additional rate taxpayers.

Tax on dividends

Dividends on shares are subject to income tax, with 10 per cent being deducted at source before each payment. There are three different income tax rates on UK dividends, depending on your income level: 10 per cent (basic rate taxpayers); 32.5 per cent (higher rate taxpayers); and 42.5 per cent (additional rate taxpayers). Non-taxpayers cannot reclaim the 10 per cent deducted at source. When you invest in UK shares you’re taxed on the transaction. This is known as Stamp Duty Reserve Tax (SDRT) for electronic transactions and Stamp Duty for transactions.

Protecting your wealth from tax

If appropriate, you may wish to consider reducing your tax bill by structuring your savings so that they are owned by the lowest rate taxpayer in your family or household.

Another way to prevent tax eroding your money is to put your cash into tax-efficient savings and investment wrappers, such as an Individual Savings Account (ISA). Because of their tax efficiency, there is an annual limit on how much money you can put into ISAs. The annual limit for the current 2012/13 tax year is £11,280 and this limit is set to increase each year in line with inflation.

Up to £5,640 of your annual limit can be saved in a Cash ISA. The remainder can be invested in a Stocks & Shares ISA. Alternatively, you could use your full £11,280 ISA allowance to invest in a Stocks & Shares ISA with one provider.

Potential for higher returns

A Stocks & Shares ISA can include individual shares or bonds, or pooled investments such as investment trusts. The main advantage of investing in a Stocks & Shares ISA is the potential for higher returns than with a Cash ISA, which pays interest at regular periods. Of course, like any investment, the value of a Stocks & Shares ISA can fall as well as rise, which means you might not get back the money you invest.

For higher (40 per cent) and additional (50 per cent) rate tax payers, dividends received inside an ISA suffer no further tax. This means investors retain 25 per cent and 36.1 per cent more of the dividend respectively than if the same investment were held outside an ISA.

Junior ISAs

Junior ISAs are long-term tax-efficient savings accounts especially for children. They are available to any child under 18, living in the UK, who does not have a Child Trust Fund (CTF) account. Like ISAs, you can use them to save cash or invest in stocks and shares. In the current tax year you can save up to £3,600 in a Junior ISA with no tax payable on the interest or dividends. Children aged 16 can also choose to open an adult Cash ISA as well as a Junior ISA. ν

All figures relate to the 2012/13 tax year. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested.