Jasmine Birtles
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How to Cut Down Tax on Your Investments in the UK
Ruby Layram
20th Dec 2024
In the recent Labour budget, Rachel Reeves announced that Capital Gains Tax (the tax that you pay on investment returns) will increase from 10% to 18% for basic rate payers, and 20% to 24% for higher rate payers. This means that you could end up handing over more of your profits to HMRC!
Although it is very important to pay the tax that you owe, there are several ways that UK investors can keep tax liabilities low and keep a little more of the profits that they make. After all, you didn’t do all of that stock market research to pay the government!
In this guide, I will share 7 ways that you can cut down tax on your investments as well as some top tips for paying your investment tax correctly.
Remember, tax varies depending on individual circumstances and it is always wise to consult a professional before you dive into tax-friendly investment options.
How Much is Capital Gains Tax in the UK?
Capital Gains Tax applies when you sell certain assets—like property, shares, or other investments—for a profit. In the UK, your CGT rate will depend on your income tax bracket.
As of the current tax year, basic-rate taxpayers pay 18% on most gains and higher-rate and additional-rate taxpayers, however, will pay 20%. The government has also been lowering the annual allowance, which means you’ll need to plan more carefully if you want to avoid this tax.
1. Buy and Hold Your Investments
A straightforward approach to reducing capital gains tax is to buy and hold your investments for the long term. Why? Because you only pay CGT when you sell an asset.
If you’re not cashing out, you’re not triggering a “taxable” event.
Long-term investing also allows you to take advantage of market growth without being hit by frequent taxes. Plus, this strategy can give your investments more time to grow and potentially recover from any short-term dips in value.
2. Gift Assets or Money to Your Partner
Here’s a great strategy that a lot of people aren’t aware of!
If you have a spouse or civil partner, you can transfer assets to them without triggering that tax man. This is because transfers between spouses or civil partners are generally free of tax. Although, it’s worth doing quite a bit of research around the fine details!
This can be incredibly useful if your partner pays tax at a lower rate than you do. By moving assets to their name, you can potentially reduce the overall CGT on your gains.
It’s a particularly handy approach for assets that have gained a lot in value, as the gains will be taxed at a lower rate when your partner decides to sell.
3. Remember to Deduct Losses and Costs
If you’ve been in the market a while, you’re probably aware that Investing isn’t always a straight path up. And if you’re new to investing, I’m sorry to break this to you!
Sometimes, assets lose value, and if you’re selling them at a loss, you can use that loss to offset any gains you’ve made elsewhere.
This is called tax-loss harvesting. By offsetting your gains with your losses, you reduce the total amount of CGT you owe.
Plus, don’t forget to include costs such as broker fees, transaction charges, and even the cost of advice or account management. These expenses can all be deducted from your capital gains, effectively reducing the profit you need to report to HMRC.
4. Put More in Your Pension Pot
Pensions aren’t just for retirement—they’re also a very effective way to reduce your taxable profits.
When you contribute to a pension, the government gives you tax relief. For example, as a basic-rate taxpayer, you receive 20% tax relief on contributions, while higher and additional-rate taxpayers get even more (40% and 45%, respectively).
Adding to your pension helps you lower your taxable income in the current tax year. Additionally, because money inside a pension grows free of capital gains tax, any growth in your investments will be free from tax as well.
This strategy is particularly useful if you’re nearing retirement or if you’re a higher earner trying to reduce your annual tax bill.
5. Max Out Your ISA Allowance
The ISA allowance is one of the most effective tax shelters available to UK investors. Each tax year, you’re allowed to invest up to £20,000 in ISAs, which grow free from income tax and capital gains tax.
There are various types of ISAs, including Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs. By using your allowance each year, you can keep a significant chunk of your investments protected from taxes. ISAs are also flexible—if you need to take money out, there’s no tax bill, and with some ISAs, you can even put it back in within the same tax year.
6. Invest in Gold Sovereigns
Gold may not be the first thing that comes to mind when you think of tax-free investing, but in the UK, there’s a tax benefit for investing in gold sovereigns.
Gold sovereigns, along with some other British coins, are considered “legal tender” and are therefore exempt from CGT.
If you’re interested in diversifying your portfolio with a tangible asset like gold, buying UK coins such as gold sovereigns can be a smart move.
Just remember that, like all investments, gold’s value can go up or down, so it’s wise to treat it as a long-term investment within a diversified portfolio.
If this tax-friendly investment appeals to you, I recommend going through a certified Gold seller such as The Bullion Club.
The Bullion Club are a UK-based company that specialises in graded Gold coins. They offer a wide selection of coins produced by The Royal Mint – the world’s leading manufacturer of Gold coins. Investing through a company such as the Bullion Club gives you the peace of mind that comes with knowing that your Gold is of the highest standard.
The Bullion Club offers a personalised service through which you can chat with one of their experts about your investment goals, knowledge and budget. The investment specialist caters to all investors and has a comprehensive selection of products to suit every need.
As a graded coin specialist, the Bullion Club carefully assesses (or grades) all gold coins before offering them to investors. This provides an objective valuation that is often preferred by collectors and investors.
7. Consider Tax-Efficient Investment Schemes
The UK government offers several tax-efficient investment schemes to encourage investment in smaller or high-growth companies. These schemes come with various benefits and tax breaks, and they can be a game-changer if you’re looking to reduce your taxable.
Here are the three main schemes that are available in the UK:
- Enterprise Investment Scheme (EIS): This offers 30% income tax relief and CGT deferral on investments in eligible small companies. Plus, if you hold your investment for at least three years, you don’t have to pay CGT when you sell.
- Seed Enterprise Investment Scheme (SEIS): Aimed at even smaller startups, SEIS offers 50% income tax relief and an exemption from CGT if you hold the shares for three years.
- Venture Capital Trusts (VCT): VCTs provide a 30% income tax relief on investments up to £200,000 per tax year, provided you hold them for five years. They also pay out tax-free dividends, which is a major benefit if you’re looking for income-focused investments.
These schemes can carry higher risks than traditional investments, so it’s essential to do your due diligence and consider if they fit your risk tolerance.
How to Pay Tax on Your Investments in the UK
Although its nice to know how to minimise the tax that you owe, its essential that you pay it correctly. No returns are wraith a run-in with HMRC!
If you do need to pay tax on your investments, you can do so through the official HMRC website..
For example, if your gains exceed your annual allowance, you’ll need to report them to HMRC. This is done either through a Self Assessment tax return or via the HMRC Capital Gains Tax service.
While tax-efficient investments help, sometimes paying tax is unavoidable. In these cases, make sure to stay organized with your records. Keep a record of all gains, losses, fees, and other costs related to your investments, so you’re ready come tax time.
When Do You Need To Pay Tax on Your Investment in the UK?
Taxes on investments in the UK typically apply when you sell an asset and make a profit over your annual CGT allowance. If you’re using ISAs or pensions, you won’t need to worry about taxes on those, but for any other investment gains, it’s worth being prepared.
You’ll need to calculate your total capital gains for the tax year and compare it to your allowance. If you’re over the threshold, you’ll need to report the gains and pay any applicable tax by January 31st following the end of the tax year in which you made the gain.
Investing can be a powerful way to build wealth, but tax is an unavoidable aspect of it. However, with a bit of planning and the right strategies, you can keep much more of your gains in your own pocket rather than HMRC’s! From ISAs to pensions, and even gold sovereigns, UK investors have plenty of options to reduce the tax impact on their returns.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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