Taxation and Your Investments

Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.

The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.

Tax and your investments

Setting aside income in the form of savings is important for everyone, to provide for the unexpected or to build up a nest egg to enjoy in retirement.

Pensions

Making pension contributions

Pensions are one of the most tax efficient forms of saving. Taxpayers benefit from tax relief on contributions at their marginal rate and investment income and capital gains will accrue within the scheme largely tax free.

An individual is entitled to tax relief on personal contributions in any given tax year up to the higher of 100% of earned income or £3,600 (gross).

Where employee contributions are made to occupational pension schemes these are usually deducted from salary before an employee’s tax is calculated. Tax relief is therefore given automatically.

Contributions to personal pension schemes are paid net of basic rate tax and the pension provider will then recover that basic rate tax from HMRC. Higher and additional rate relief, if appropriate, can be claimed from HMRC.

Employer pension contributions are an exempt benefit for the employee and a deduction from profits may be available to the employer.

There are controls which serve to limit the availability of tax relief on high levels of contribution. These are complex but, put simply, they may give rise to a tax charge if annual contributions exceed £60,000. This threshold is reduced for high income individuals; generally where a taxpayer has adjusted income in excess of £260,000 the maximum annual contribution possible will be restricted by £1 for every £2 for the excess income. The minimum annual allowance available after this restriction is £10,000.

Tax Tip
Making pension contributions may limit the reduction of your personal allowance where you have income in excess of £100,000. We can assist you with planning your pension contributions.

Pensions freedom

Taxpayers have choice and flexibility when it comes to accessing their personal pension fund. Options include taking a tax free lump sum of 25% of fund value and purchasing an annuity with the remaining fund or opting for a more flexible drawdown.

The flexible drawdown rules allow for total freedom to access a pension fund from the age of 55. Access to the fund may be achieved in one of two ways:

  • allocation of a pension fund (or part of a pension fund) into a ‘flexi-access drawdown account’ from which any amount can be taken over whatever period the person decides
  • taking a single or series of lump sums from a pension fund (known as an ‘uncrystallised funds pension lump sum’).


A taxpayer will typically take their tax-free lump sum from the fund at the same time as making an allocation into a flexi-access account. Where uncrystallised lump sums are withdrawn, 25% of each payment is tax free.

The total amount which can be withdrawn as a tax free lump sum (under whichever option chosen) is generally limited to a total of £268,275, except in certain circumstances where previous protections apply. Other income withdrawn from a fund is taxable as income.

The rules on pensions drawdown are complex and there are a number of options for taking a pension. Getting the right advice at the point of retirement is therefore crucial.

Money Purchase Annual Allowance (MPAA)

The government is aware of the possibility of people taking advantage of the flexibilities by ‘recycling’ their earned income into pensions and then immediately taking out amounts from their pension funds. The MPAA sets the maximum amount of tax-efficient contributions an individual can make at £10,000 per annum in certain scenarios.

Tax free savings

Tax Tip
Don’t forget to use the dividend and savings allowances. These allowances tax £500 of dividends and up to £1,000 of savings income at 0%.

Individual Savings Accounts (ISAs)

ISAs are free of income tax and CGT. There are maximum investment limits which apply for each tax year but, over several years, large investments can be built up. The overall annual ISA savings limit is £20,000. Investors can choose to invest in a cash ISA, stocks and shares ISA or an Innovative Finance ISA as long as they do not exceed the investment limit.

Lifetime ISA

The Lifetime ISA is available to adults aged between 18 and 40. Individuals are able to contribute up to £4,000 per year and receive a 25% bonus from the government (up to £1,000). If £4,000 is invested, the investment limit for the other types of ISAs falls to £16,000.

Funds, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after the first subscription or can be withdrawn from age 60 completely tax-free.

Other tax efficient investments

The following investments work in varying ways. You should consider your needs in detail before entering into any commitments.

National Savings and Investment premium bonds

Premium bonds are tax free and you could win £1 million. However, the annual rate of return is not predictable.

Single premium insurance bonds

The growth on insurance bonds is taxed at 20% and paid directly out of the bond. For a higher rate taxpayer bonds provide a means of deferring income into a subsequent period when it may be taxed at a lower rate. Withdrawals of up to 5% of the original investment can be made each year without incurring an immediate tax charge.

Complex tax reliefs can be available on withdrawal or on maturity of the bonds. Please consider taking advice on the implications prior to making withdrawals in excess of the annual 5% limit and on maturity.

Venture Capital Trusts (VCT)

These bodies mainly invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT (note limits apply where large investments have been made in any one tax year). Income tax relief of 30% is available on subscriptions for VCT shares, up to £200,000 per tax year, as long as the shares continue to be held for at least five years.

The Enterprise Investment Scheme (EIS)

The tax reliefs for EIS investors are:

  • Income tax relief at 30% is available on new equity investment (in qualifying unquoted trading companies) of up to £1 million. A higher limit of £2 million may apply to investments in ‘knowledge intensive companies’.
  • A CGT exemption on sales of EIS shares held for at least three years.
  • If the gain on the sale of any chargeable asset (eg quoted shares, second homes, etc) is reinvested in EIS shares, the gain on the disposal can be deferred.

Seed Enterprise Investment Scheme (SEIS)

The tax reliefs for SEIS investors are:

  • Income tax relief at 50% in respect of qualifying SEIS shares up to an annual maximum investment (in all SEIS companies) of £200,000.
  • A CGT exemption where SEIS shares are sold more than three years after they are issued (as for EIS).
  • A further CGT exemption of 50% where an individual makes a capital gain and reinvests the gain in qualifying SEIS shares. Note this is an exemption rather than a deferral as for EIS.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

Redshield Chartered Accountants Team

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We’ll make your accounting easier.

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