Banking 101 –
How to be Tax-Efficient: Structuring Your Wealth
Find out which allowances and structures can help you increase tax efficiency. Protect and grow your wealth with guidance around how to be tax efficient.
Tax is one of the few certainties in life; higher income and bigger gains mean a higher potential tax liability. There are, however, many ways to structure your finances to increase tax efficiency.
Why is it important to structure your assets tax-efficiently when you are a high-net-worth individual? Simply put, better tax efficiency helps you to protect and grow your wealth and enables better investment returns. The use of relevant tax allowances and exemptions can make all the difference in achieving personal financial objectives.
A Wealth Planner can advise you on how to be tax-efficient and how to measure tax efficiency to grow your wealth and achieve your short- and long-term goals. The use of the below allowances and structures can be key elements of a personalised tax-efficient wealth plan, aligned to your objectives.
How to be tax-efficient: UK investor tips
The standard personal allowance is £12,570, which is the amount of income you do not have to pay tax on.
Additionally, your personal allowance will be reduced by £1 for every £2 you earn over £100,000. This means that by the time you earn £125,140, you will have to pay income tax on all of your income.
Individual circumstances can also impact your personal allowance, such as the under / overpayment of tax from previous tax years, marriage allowance, or receipt of child benefit for example.
An individual has a dividend allowance of £1,000 (2023/24 tax year) to set against any dividend income, with no tax being due on this amount. This is £1,000 less than in the 2022/2023 tax year.
Capital gains tax (CGT) exemption
Capital gains (gains arising from disposals of certain capital assets) of up to £6,000 are exempt from tax in the 2023/24 tax year. This is a reduction from £12,300 from the previous tax year. The CGT exemption will fall again to £3,000 in 2024/25 tax year.
Individual savings accounts (ISAs)
ISAs are among the most tax-efficient investment wrappers available. Assets within an ISA are not subject to income tax or capital gains tax and can generally be accessed at any time. Individuals can invest up to £20,000 per tax year (2023/24 ISA allowance) into an ISA.
Under 18s can invest in a Junior ISA where the savings limit is £9,000. If aged between 16 and 18, you can also invest in a Cash ISA up to a maximum of £20,000.
Pension Annual Allowance
Your pension annual allowance is the most you can accumulate annually in a pension scheme and still receive tax relief. The maximum is usually the lessor of £60,000 or 100% of your earnings. Although for those with higher earnings and / or who have accessed their pension already this can reduce to £10,000.
Unused annual allowances for the preceding three tax years may be used subject to having enough taxable relevant earnings in the year of making a pension contribution. Funds can be accessed from age 55 (under current rules), with up to 25% paid tax-free, usually subject to a limit of £268,275.
Enterprise Investment Scheme (EIS)
An investor who subscribes for shares in an EIS-qualifying company can obtain an upfront income tax reduction of up to 30% on investments of up to £2m each year. There are many other tax advantages, including tax-free capital gains after completion of the required holding period.
Venture Capital Trusts (VCTs)
An investment into qualifying VCT shares enables an investor to claim several tax incentives on investments up to £200,000 each year, including up to 30% tax relief. Any dividends paid from the investment will be tax-free.
Investments with inheritance tax (IHT) advantages
Some investments in UK companies qualify for Business Relief. If certain criteria are met, these investments can be passed on to your beneficiaries free of IHT. We recommend discussing these investments, as part of a wider strategy, with a Wealth Planner.
Making use of these allowances and structures is key to creating a tax-efficient wealth plan that aligns with your goals.
The right Wealth Planner will help you develop a strategy for how to be tax-efficient and develop a plan to meet your specific needs. At Arbuthnot Latham, no two wealth plans are identical. Our aim is to help you grow, protect, and pass on your wealth through sound strategic management of your finances.
You should seek professional advice before making any investment decision. The value of investments and the income from them can fall and rise, and you could get back less than you invest. Past performance is not a reliable indicator of future results. Taxation rates and allowances are subject to change.
Further reading about Wealth Planning
Record-breaking inheritance tax receipts are rolling into HMRC. But families can reduce the chances of being hit by a hefty inheritance tax bill by taking steps now. In this article, we discuss ways to ensure your beneficiaries will receive a more significant transfer of wealth.
An estate plan is about more than inheritance tax mitigation or simply drawing up a will. It’s about understanding your preferences and arranging your assets so that you can live the lifestyle you want whilst making provisions for those you love during your lifetime and after your death.
Gifting can form a great part of your overall wealth planning strategy. By having the right plan in place and using the allowances and tax reliefs available, it is one way to maximise the inheritance you leave for your loved ones.
Becoming a client
Take control of your finances today by completing our enquiry form. Alternatively, you can call us on the number below and one of our team will be more than happy to talk about your future.