How Can I Reduce the Amount of Tax I Pay on My Investments?

How Can I Reduce the Amount of Tax I Pay on My Investments?

Everyone’s searching for ways to pay as little tax as possible in order to keep more of their hard-earned money and investments are often a great place to start. So in this post, we’re going to guide you through a couple of strategies to help you pay less on your own investments.

Transfer Your Investments to a Spouse

One strategy that you can use to lower the amount of tax you pay on investments is to transfer them to a spouse. Married couples often have their investments and savings in joint names, but there are times when shifting investments around could actually be more tax-efficient.

However, this does mean that the investments will be in your spouse’s name and they will be given full control of your money, so don’t do this unless you are extremely confident and trust your spouse with that responsibility.

Let’s use an example.

Mary works at a well-paying job that puts her into a higher tax rate band, but she also invests her money into shares. She wants to dispose of her shares in a company, resulting in a potential capital gain of £40,000.

Since she’s in a higher rate tax band, this subjects her to 20% tax on her capital gains. After the allowance of £11,700 during the 2018/2019 tax period is dedicated, the chargeable gain is £28,300. This means she has to pay £5,660 in capital gains tax due to her higher tax band.

Client 1

Gain £40,000.00
Allowance £11,700.00
Chargeable Gain £28,300.00
CGT Rate 20%
CGT Charge £5,660.00

That’s quite a hefty amount of tax to pay, so let’s imagine she uses this strategy and transferred half of her shares to a spouse who is a basic rate taxpayer.

This means that the chargeable gains would be £8,300 for both her and her spouse after allowance deductions on capital gains tax. This means Mary would only be paying 20% of £8,300 in capital gains tax and her spouse would be paying 10% of £8,300. This is a total of £2,490 – a saving of £3,170.

Client 1 Client 2
Gain £20,000.00 £20,000.00
Allowance £11,700.00 £11,700.00
Chargeable Gain £8,300.00 £8,300.00
CGT Rate 20% 10%
CGT Charge £1,660.00 £830.00
Saving £3,170.00

Even if her spouse was also in a higher rate tax band, it would still be £3,320 total and a saving of £2,340.

Client 1 Client 2
Gain £20,000.00 £20,000.00
Allowance £11,700.00 £11,700.00
Chargeable Gain £8,300.00 £8,300.00
CGT Rate 20% 20%
CGT Charge £1,660.00 £1,660.00
Saving £2,340.00

It’s worth mentioning that you can also transfer up to 10% of your personal income tax allowance to a spouse. This is known as Marriage Allowance and you must earn a certain amount of money in order to be eligible.

Using Annual Individual Savings Accounts Allowance

The ISA allowance amount has been frozen at £20,000 since the 2018/2019 tax year, meaning you can shelter money from investments in ISAs. This means that your potential returns could be completely free of income tax and capital gains tax.

You’ll be able to split your ISA allowance between a Stocks and Shares ISA or a Cash ISA, but you can also just use a single one if you prefer. If you invest outside of an ISA, you will need to pay tax if your dividends go over the £2,000 dividend allowance.

Personal Savings Allowance

There’s also an additional £1,000 in personal savings allowance whereas higher rate taxpayers have a £500 allowance. However, you won’t be eligible for this if you are an additional rate taxpayer.

If you are looking to get help with your investments please do contact us here ar TKV Financial Management Ltd through our website, email or call 01384 671947.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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About the author: Tim Veiro