With the UK’s economic situation being dire for a great majority of individuals and households across the country, more people than ever are actively reckoning with their savings and cost burdens. Taxation is unilaterally a good thing for society, but in times of downturn it can make sense to seek methods for reducing short-term outgoings. As someone hoping to save money for the long term, what are some tax-efficient methods of doing so?
First, it is helpful to understand a simple tax allowance available to you that many are unaware of. Everyone in the UK has a personal savings allowance, of £1,000 per year. This states that if your savings earn interest, you can earn up to £1,000 of interest before you start to pay Income Tax on your savings.
For the casual saver looking at high-interest savings accounts to passively grow their wealth, this relatively small allowance can be a significant boon to an overall savings plan.
There is a more considerable form of tax-free allowance, though, that can be accessed through the opening of a cash ISA. Cash ISAs allow you to put in a certain amount of money up to a government-decided cap (currently £20,000), which is free of any Income Tax burden on dividends or profits. Cash ISAs are not the only form of ISA; there is another which can be useful for the more active investor, more on which later.
Usually, the trading of stocks, assets and currency in their corresponding markets is a taxable endeavour. Stocks and shares are viable ways to grow income semi-passively over time, as businesses succeed and assets appreciate. However, when you come to sell your holdings in a business in order to realise this profit, you become beholden to Capital Gains Tax, or CGT.
CGT is not something that the vast majority of retail traders needs to worry about, given that the threshold for CGT liability is over £12,000. However, for those aiming to profit considerably from holdings and investments, the tax rate above this threshold can be damaging.
This is where spread betting comes in. Spread betting is a speculative process that sees you make predictions on the movements of a given asset, stock or fund. This prediction is made on margin, meaning a fraction of the value of the holding is paid in; spread betters do not purchase the stocks or assets themselves, but instead speculate on their movement. This arrangement means that spread betters are not liable to pay CGT at all – resulting in a tax-free way to engage with stock and currency markets.
Stocks and Shares ISAs
For the investor that wants to retain more direct control over their portfolio, through the ownership of stocks and shares as part of a long-term investment portfolio, there is another way to reduce or even eliminate the associated tax burden: stocks and shares ISAs.
Just as with cash ISAs above, stocks and shares ISAs afford you an allowance of up to £20,000 tax-free. But stocks and shares ISAs are different in that they are a ringfence for investments. Through your ISA, you can invest in stocks, assets and mutual funds without the resulting CGT or Income Tax burden.