UK residents can save up to £60,000 per year on their pensions

As the tax year rapidly approaches, Madeleine Ingram, Director at Calculus, has shared some tips on how UK individuals can make the most of their tax-efficient investments. From ISAs to pensions, Venture Capital Trusts (VCTs) to Enterprise Investment Schemes (EISs), she believes that with some forethought and planning, people can make their money work as hard as it can for them now and in the future.

Ingram explained that when it comes to ISAs, individuals need to be aware of their options and consult a financial advisor if unsure. She highlighted that the interest payments made under an ISA are tax-free, allowing investors to get more value for their money. She also mentioned that the annual ISA allowance is £20,000. However, choosing the best ISA can be challenging due to the variety of options available, including classic cash, stocks, shares ISAs, Help to Buy ISAs, Lifetime ISA, Innovative Finance ISAs, and Junior ISAs.

Speaking on pensions, the Director at Calculus said the most significant pension change from Chancellor Jeremy Hunt's March budget was eliminating the lifetime allowance (LTA), beginning in April 2024. The government has maintained a cap on the tax-free money you can get, setting it at 25 per cent of the current LTA, or £1,073,100.

"That means you can withdraw up to £268,275 without paying any tax on it," she added.

In March, British Prime Minister, Rishi Sunak, maintained the government's positions on taxes, reiterating its plan to prioritise inflation reduction over tax cuts.

Meanwhile, Ingram didn't fail to note that individuals in the UK could save a total of £60,000 per year on a pension without incurring an additional tax penalty, up from the previous cap of £40,000. There are still tapering restrictions for high incomes, but the new lower cap has increased from £4,000 to £10,000 annually. According to her, many consider VCTs and EISs a second retirement savings option because contributions above the annual cap are taxed heavily.

Ingram further said people living in the UK could reduce their tax responsibilities by investing in venture capital trusts (VCTs) and enterprise investment schemes (EISs), which are tax-efficient investment vehicles. Investments in VCTs are eligible for a 30 per cent income tax break up to £200,000 each tax year, provided they retain the investment for at least five years.

She added: "Most VCTs also pay out annual tax-free dividends and any profits on disposal are free of capital gains tax (CGT). EISs are similar in that they offer 30% income tax relief."

Additionally, Ingram stated that the maximum investment per tax year is £1 million - or £2 million if the investee companies meet the "knowledge-intensive" standards. Investors in EIS can postpone their CGT obligations, and EIS gains are not subject to the CGT tax.

Furthermore, if held for at least two years and at the time of death, EIS investments are exempt from inheritance tax. If investors invest in certain knowledge-intensive particular EIS Funds before April 5, 2023, they may be eligible for income tax reduction carryback to 21 or 22.

Tax on Capital Gains

Ingram also advised people in the UK to take advantage of their Capital Gains Tax (CGT) allowance. She warned that gains on assets sold outside of a tax wrapper may be subject to up to 20 per cent CGT, or 28 per cent on residential property investments if the annual CGT allowance is less than £11,700.

To maximise tax efficiency, Ingram recommended that people consider selling some CGT-eligible assets now and some after April, to utilise both annual allowances. She also advised people to seek the advice of a qualified financial adviser for investment decisions.

Ingram emphasised that with a little forethought and preparation, people can make their money work harder for them now and in the future. Many people in the UK have become more concerned about their incomes and spending, as the economy faces recession and an unprecedented cost of living crisis.

Enterprise Investment Schemes and Venture Capital Trusts promote investments in unquoted and small trading enterprises, providing tax benefits to investors who buy new shares in such companies.

According to HSBC UK, one of the fundamental advantages of an ISA is that you can invest or save money without having to pay capital gains tax or income tax on any interest income. With tax-efficient investments such as ISAs, pensions, EISs, and VCTs, there are many ways to maximise tax efficiency, but it is important to do so with caution and with the guidance of an expert.