Staying Tax Efficient in 2023

At the Autumn Statement, the Chancellor said that we are all going to pay more tax in future years. While there is often little you can do about frozen income tax allowances, there are still many tax reliefs available when it comes to investing for your future.

Usually, the most tax-efficient way to invest for your future is through your pension. But once you have your pension position for you and family members sorted (navigating the complexities of pensions annual allowance and lifetime allowance), what other options are there?

Most people are familiar with Individual Savings Accounts (ISAs) but there are some key things to remember right now. Stocks and shares held in ISAs do not trigger tax liabilities on either dividend income or any capital gains made on sales – this will be more important in future as both the annual dividend allowance and capital gains exemption are due to reduce in future years.

If you have investments outside ISAs, it’s probably a good time to review them: remember it is possible to sell investments and then buy them back within the tax-free wrapper of an ISA. Everyone can realise capital gains up to the annual exemption tax-free – £12,300 in 2022/23, but the allowance is lost if not used and reduces in future: to £6,000 for 2023/24 and £3,000 from 2024/25 onwards. Married couples and civil partners can transfer assets between them on a no gain/no loss basis, and such transfers could be considered to ensure that both spouses’ annual exemptions can be fully utilised, but it is important to ensure that any such transfer is outright and unconditional.

Any UK resident can have an ISA: from age 18, UK residents can invest up to £20,000 each in an ISA, and parents can fund a junior ISA or child trust fund with up to £9,000 per child – (that’s £58,000 for a family of four). And you can use them for longer term planning – for example, if you have an adult child planning to buy a home, consider gifting funds to them so that they can invest in a Lifetime ISA (LISA). Savers can invest up to £4,000 a year, to which the government will add a 25% tax-free bonus (max. £1,000 a year) towards a first home or as a pension as part of their overall £20,000 ISA annual investment limit.

For more experienced investors, it might be worth taking a look at longer term investments in Venture Capital Trust (VCT) investments or smaller companies whose shares qualify for the Enterprise Investment Scheme (EIS). As these investments carry a higher level of risk, there are significant tax reliefs available. For example, investments in qualifying EIS companies attract income tax relief at 30% on a maximum annual investment of up to £1 million for qualifying individuals: VCTs also qualify for 30% tax relief on investments of up to £200,000 a year.

They also have capital gains tax advantages - for example, if you hold EIS shares for three years (or five years for VCT units), any later gain on sale is exempt from capital gains tax. Equally, if you make a capital gain on selling another asset, you can defer the tax on it by investing in EIS shares. Of course, despite the tax advantages available, it is important to get investment advice from an independent financial adviser.

Read our guide to personal tax planning or get in touch with our team.