In the UK, individuals are generally subject to income tax on all income earned during the tax year, such as savings income, dividends, and earnings. However, there are several tax-efficient investment options available that allow individuals to reduce or avoid income tax. In this article, we explore some of the most notable tax-efficient investments.
National Savings Certificates
National Savings Certificates are a popular investment choice due to their guaranteed fixed return over a specified term, typically three or five years. The interest earned on these certificates is completely tax-free. It’s important to note that National Savings Certificates differ from other National Savings & Investments products, such as Income Bonds and Investment Accounts, which are taxable.
Premium Bonds
Premium Bonds are one of the UK’s most popular savings products, with over £100 billion currently invested in them. Individuals can invest any amount between £25 and £50,000 in Premium Bonds.
Rather than earning interest, Premium Bonds work as a monthly raffle with prize draws offering tax-free prizes ranging from £25 to £1 million. The funds can be cashed out at any time, with the principal returned to the investor.
Individual Savings Accounts (ISAs)
ISAs are tax-advantaged accounts that allow individuals to hold a variety of investments. The main benefits of ISAs include:
No income tax on interest or dividends.
No capital gains tax on asset disposals.
No minimum lock-in period; withdrawals can be made at any time.
There are four main types of ISAs:
Cash ISA: A tax-free savings account.
Stocks & Shares ISA: Holds a range of investments, such as shares, unit trusts, and bonds.
Innovative Finance ISA: Holds peer-to-peer loans.
Lifetime ISA: Designed for saving for a first home or retirement.
Additionally, Junior ISAs allow contributions of up to £9,000 per year for children under 18, and can be made by parents or anyone else. Withdrawals from Junior ISAs are generally not permitted until the child reaches 18. Junior ISAs can be either cash or stocks & shares ISAs.
An individual can save up to £20,000 annually across all types of ISAs. There is no minimum investment period, and withdrawals from all ISAs, except the Lifetime ISA, can be made at any time without penalty.
Other Exempt income
Lastly we will look at some of the income which are specifically exempt from income tax in the UK. These are:
· Income from betting, gaming or lotteries.
· Many social security benefits such as universal credit, housing benefits and winter fuel payments for the pensioners.
It should be noted that the state pension and job seekers allowance are taxable income. Child benefit is not taxable, however high income child benefit charge applies if the one of the partner’s income exceeds £60,000.
Speak to an Expert
If you're interested in learning more about the available tax-efficient investment options or need guidance on choosing the best one for your financial goals, feel free to contact us. We’re here to help you make the tax efficient financial decision.
Authored by: London Tax Team
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