Investment Guides

Tax efficient investing on OFF3R

ISA season is upon us with less than one month to go until the end of the tax year. As investors we’re faced with a case of ‘use it or lose it’ when it comes to our £15,240 ISA allowance.

As interest rates remain low and inflation rates continue to rise in the UK, the government provides investors with tax efficient investing incentives to help offset the low levels of interest rates and climbing levels of inflation. 

The following guide provides an overview of the tax-efficient wrappers, such as individual savings accounts (ISAs), pension plans and enterprise investment scheme (EIS) investments that are available in the UK and how, when used efficiently, they can support the growth of a diversified portfolio.


Individual Savings Accounts (ISAs)

What are they?

ISAs are a tax-free way to save or invest. On a general savings account you will generally be required to pay income tax on any interest earned and similarly on any capital gains made through investing . ISAs provide a ‘tax-free wrapper’ up to a certain allowance to retain savings or  reduce capital gains tax on interest.

You can invest a fixed amount in an ISA each tax year. This amount is set at the start of the tax. The amount you can put into an ISA is currently set at £15,240. This is set to increase to £20,000 for the 2017-2018 tax year.

In the UK, there are three main types of ISA:

1. The Cash ISA

A Cash ISA is simply a savings account that you don’t pay any tax on. You will not be charged to open a cash ISA, however there are many differing rates across providers. A number of providers will also guarantee your money via the Financial Services Compensation Scheme (FSCS).

2. The Stocks & Shares ISA

A Stocks and Shares ISA facilitates investing into bonds, shares and funds. Whilst they are not always entirely tax-free, you will be exempt from capital gains tax should you wish to sell your ISA investment and it has increased in value. However, as with other investments in stocks and shares the value of your investment can go down as well as up.

Please head over to the Stocks and Shares ISAs channel on OFF3R to compare available opportunities.

3. The Innovative Finance ISA

Introduced in April 2016, the newest ISA is the Innovative Finance ISA (IFISA). The IFISA allows individuals to lend money through FCA-regulated and approved P2P lending platforms where the returns are tax free. The returns currently being offered by the providers listed on OFF3R are between 3 to 8.5%.

Please head over to the Innovative Finance ISA channel on OFF3R to compare available opportunities.

Risk Warning: As with all investing, your capital is at risk. Investing in start-ups and early stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Investing in start-ups may expose the individual concerned to a significant risk of losing all of the money or other assets invested.


Enterprise Investment Schemes (EIS) & Seed Enterprise Investment Schemes (SEIS)

What are they?

EIS

The EIS seeks to help smaller, higher-risk companies to raise finance. This is done through offering tax reliefs to investors who purchase shares in these companies, thus incentivising investors.

SEIS

The SEIS was implemented in a quest to facilitate raising equity finance for small or early-stage companies. The SEIS has been widely recognised as a complementary feature to the EIS with the difference being that the SEIS acknowledges those ‘very-early stage’ companies, with much lower qualifying criteria. As with the EIS, the SEIS tax reliefs are offered to individual investors in such companies.

Read the full OFF3R EIS & SEIS Guide here.

Please head over to OFF3R to compare the available EIS and SEIS qualifying opportunities

Risk Warning: As with all investing, your capital is at risk.An Investor should be aware that SEIS or EIS Tax Relief and Capital Gains Tax Reinvestment Relief is only available on the amount actually invested on his or her behalf in Qualifying Companies, not on the total amount of his or her Commitment to the Fund.Taxation treatment depends on the individual circumstances of the Investor and may change in the future.


Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) Funds

What are they?

A SEIS and EIS fund is designed so that a professional managers choose companies for individuals, to invest their money into.

There are two ways in which these funds tend to operate:

  1. An SEIS and EIS fund manager will make the investment on your behalf, resulting in the shares ending up in your name. This ultimately means that tax reliefs can only be claimed once the money has been invested into the qualifying companies.
  2. Some SEIS and EIS funds have been specifically approved by HMRC, facilitating all the investors’ tax relief to be claimed when the investment funding round has closed.

Read the full OFF3R Advanced Guide to EIS & SEIS here.

Please head over to the SEIS & EIS Funds channel on OFF3R to compare available fund opportunities.

Risk Warning: As with all investing, your capital is at risk.An Investor should be aware that SEIS or EIS Tax Relief and Capital Gains Tax Reinvestment Relief is only available on the amount actually invested on his or her behalf in Qualifying Companies, not on the total amount of his or her Commitment to the Fund.Taxation treatment depends on the individual circumstances of the Investor and may change in the future.


Pension Schemes  

What are they?

A pension scheme is an investment vehicle with the purpose of saving money and investing in it whilst working in order to use it as income when you stop working, with tax-privileges.

In the UK, there are 3 different types of pension schemes:

1. The Personal Pension

You can pay up to £40,000 per year or the value of your annual salary (whichever is lower) into your personal pension. If you’re a basic rate taxpayer, the government will add an additional 20% contribution to whatever amount you put in [1], and if you are a higher-rate taxpayer you can claim more via your tax return.

2. The Workplace Pension

A workplace pension is one in place through an employer. It will typically be automatically contributed to through your monthly salary, and your employer will generally match said contribution up to a certain amount.

3. The State Pension

Through national insurance (NI) contributions out of your salary you can be entitled to a state pension. It is intended to ensure that everyone has a basic sum of money to support them in their old age. You will need to have at least 35 years’ worth of NI contributions to be entitled.

 

Please head over to the Robo-Advisors channel on OFF3R to compare the available pension opportunities.

Risk Warning: As with all investing, your capital is at risk. The value of your pension can fall as well as rise and you may get back less than you invest. Eligibility to invest in a pension depends on personal circumstances. Tax rules may change in future. If you need help with pensions, seek independent financial advice. Note that you can’t withdraw money from a personal pension until you’re 55.

Sources

[1] https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

About the author

Lily Bridgwood

Lily Bridgwood

Lily is the Partnerships Associate at OFF3R. She has previous work experience in both the corporate and start-up environments. She joined the OFF3R team in October having recently graduated with First-Class Honours in International Business from the University of Edinburgh.