Choosing the right tax wrapper

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020 7488 7171

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Minimising the tax that you pay on your investment returns is essential. However, it can be hard to know whether an ISA makes more sense than a Pension, or even just a simple investment account.

UK investors are now faced with a number of tax efficient investment wrappers, notably ISAs and Pensions. Deciding which to use can be a daunting task, so we have designed a calculator to help guide you towards the best solutions, highlighting strengths and weaknesses.

Individual Savings Account (ISA)

Advantages Disadvantages
Tax free withdrawals – no Income Tax or Capital Gains Tax Contributions are limited to the annual allowance
Growth within the plan is not liable to Income Tax or Capital Gain Tax (CGT) There is no tax relief on contributions
Possible to invest in either cash or stocks and shares Once money is withdrawn from an ISA it cannot be put back, so the tax advantages are lost
Can transfer your plan between providers without losing your accrued ISA status ISAs are liable to Inheritance Tax (IHT)
The ISA status can be inherited by a spouse If you do not use your annual ISA allowance you will lose it, it cannot be carried forward
Income from an ISA is not taken into account for age-related personal allowances Only one ISA can be opened each tax year. Opening a second ISA may result in a tax liability
You cannot have a joint ISA or put it in trust

General Investment Account (GIA)

Advantages Disadvantages
You can contribute as much as you like When you sell funds for a profit you may have to pay Capital Gains Tax, if you’ve already used your annual allowance
You can use your annual Capital Gains Tax Allowance to realise profits each year You may have to pay Income Tax on interest or dividend payments but there will be a tax free allowance of £5,000pa from 2015/16
You can have more than one account Tax Relief is not available for contributions
Can be held in joint names or in a trust GIAs are liable to Inheritance Tax (IHT)
Can be used to top up your ISA each year

Self-Invested Personal Pension (SIPP)

Advantages Disadvantages
Tax relief is available on contributions up to the Annual Allowance Contributions are limited to the Annual Allowance, plus any Carry Forward
It is possible to carry forward up to three years of Annual Allowance under certain circumstances You cannot access funds held within a pension until age 55
25% of your fund is available as a tax free lump sum is available after age 55 Income from your pension is taxable
Growth within the plan is not liable to Income Tax or Capital Gain Tax (CGT)
There is usually no Inheritance Tax on a pension fund

ISA & Pension Basics

Annual limits:
  • Junior ISA £4,080
  • ISA £15,240
  • Pension 100% of salary up to max of £40,000 (less for earnings over £150,000), min of £3,600
Access
  • Junior ISA @ 18
  • ISA at anytime
  • Pension after 55 (57 from 2028)
Tax incentives
  • Junior ISA & ISA: tax free returns
  • Pension: tax relief on contributions, tax free returns, tax paid on distributions other than 25% lump sum, usually free of IHT

Investment Account

  • There is an annual tax free allowance for capital gains and the highest rate of CGT (20%) is considerably lower than higher rates of Income Tax.
  • There is a tax free allowance of £5,000 for dividend income.
  • With such a short timescale you should consider a deposit account.
  • There is no suitable alternative to an investment account.
  • It might be worth considering VCTs to provide other tax reliefs.
  • It might be worth considering EIS to reduce IHT liabilities and provide other tax reliefs.
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ISA

  • ISAs usually have no extra charges and permit instant access.
  • At the current age only a JISA is available.
  • The expected realisation date is before the earliest permitted exit from a JISA.
  • ISA tax allowances are especially valuable over long investment periods.
  • The ISA allowance has already been used in the current year. Consider using an investment account and then switching after April 5th.
  • ISAs are subject to IHT but the ongoing tax benefits of the wrapper can be preserved for transfers to spouses.
  • Nil tax on investment returns represent a significant benefit for those paying higher rates of Income Tax.
  • The proposed investment amount is greater than the ISA allowance, consider deferring some investment until after April 5th.
  • The proposed investment amount is greater than the JISA allowance, consider deferring some investment until after April 5th.
  • The annual investment amount is greater than the ISA allowance.
  • The annual investment amount is greater than the JISA allowance.
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SIPP

  • You are able to make a pension contribution and subsequently withdraw up to 25% tax free cash sum.
  • You are not entitled to tax relief on pension contributions.
  • The expected realisation date is before access to a pension fund is allowed.
  • You are expecting to pay a higher rate of tax in retirement than your current marginal rate.
  • The pension allowance has already been used in the current year, consider using an investment account and switching after April 5th.
  • Pensions can be an attractive vehicle for passing on assets to your family without incurring IHT.
  • Tax relief on pension contributions plus nil tax on investment returns represent a significant benefit.
  • You will be liable to tax on all withdrawals from a pension scheme, despite not receiving tax relief on contributions.
  • Your tax rate in retirement is expected to be lower than your current marginal rate. This is a favourable situation for pension contributions.
  • Although you are expecting to pay a similar rate of tax on your pension income as at present, you will still have the benefit of the Tax Free Cash Sum.
  • The investment amount is greater than your annual pension allowance so it may be desirable to phase investment over more than one tax year.
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Confused? Call us:

020 7488 7171

Monday-Friday, 8:30am-5:30pm

Important Information

Nothing on this website should be construed as offering personal advice. Please remember that the eligibility to invest in an ISA, Junior ISA or pension will depend on individual circumstances. Tax rules and rates may change in the future. The value of investments can rise and fall and you may not get back the amount invested.