How you allocate your long-term savings between cash, bonds, shares and commercial property investment funds can have a big impact on how your money can grow.
Investment returns come in the form of interest on cash and bond (also known as fixed income) funds, dividend payments and retained profits arising from owning a part of profitable companies or funds invested in commercial property.
The more you can minimise taxation of the income and gains, the more returns you retain and the more your savings can grow. The majority of people, particularly in the early stages of their wealth accumulation journey, don’t pay tax on the income and gains arising from savings and investments. That’s because basic and higher rate taxpayers are allowed to earn a tax-free amount of income and all taxpayers are allowed to make a certain amount of tax-free capital gains each tax year.
A basic rate taxpayer can currently earn up to £1,000 in interest from savings accounts and bonds (higher rate taxpayers can earn £500), and all taxpayers can earn up to £2,000 in dividends from equities and £11,800 in capital gains from any asset in the 2018/19 tax year.
Based on current yields this means you would need to have more than £67,000 in cash or over £50,000 in fixed income funds and up to £50,000 in equity-based holdings before the income arising would be taxable.
If you hold savings and investments within an Individual Savings Account (ISA) those income and gains arise without further tax, whatever your tax position. While an ISA is most attractive for those with more than £50,000 of investments and where they are also a higher or additional rate tax payer, it can still make sense for basic rate taxpayers and those with modest amounts to hold investments within an ISA. There is no extra charge for investing in an ISA and there is no need to declare the savings and investment returns on your tax return.
You can invest up to £20,000 each tax year into an ISA. This can be into a cash ISA, an investment linked ISA, or a combination of the two. It’s also possible to get a bonus from the government if the cash ISA component is made to a Help to Buy or Lifetime ISA, but there are certain restrictions and penalties for withdrawals.
The ISA allowance is a ‘use it or lose it’ entitlement and can’t be carried forward if you don’t use it within a tax year. With Legal & General you can get started with just £100 a one-off payment, or as little as a £20 regular monthly contribution, so you can start on your investment journey today.
Please remember that the value of your investment and any income from it is not guaranteed, and can fall as well as rise. You may get back less than you invest.