3 investing resolutions for the new tax year

Times are hard, money is tight, and taxes are rising. Britain’s tax burden is higher than at any time since World War II, he said – on track to reach 37.7% of GDP, according to the Office for Budget Responsibility.

The income tax threshold has been frozen until 2028, hitting many people in the tax band with higher rates through ‘fiscal drag’, as their income rises faster than the tax threshold.

Capital Gains Tax receipts will increase, as the annual Capital Gains tax-free allowance is cut from £12,570 to £6,000 – and then again to £3,000 in 2024.

The second scandal of taxation is that the dividend tax – which did not exist a few years ago – will drag more money from all of us. The tax-free allowance, which was £5,000 when dividend tax was first introduced in 2016, will drop from £2,000 to £1,000, and then drop again to £500 from April 2024.

More than ever, we as investors need to stay smart about ourselves if we want to achieve our investment goals – wealth accumulation, income generation, a comfortable retirement, or whatever.

So here, in the spirit of that sentiment, are three resolutions for the new tax year.

Shelter wealth in an ISA, not a brokerage or investment account

I know, I know. Everywhere you look, personal finance commentators are urging us all to max out our ISA contributions, paying whatever they can afford – ideally for a £20,000 allowance. You would be forgiven for imagining that by now, everyone knows this, and regularly adheres to it.

But the fact remains that it is not just a large number of people not do this, or even try to do it, but also like to continue investing in a regular brokerage account, or as a non-ISA together with an investment fund provider.

Why? Inertia, perhaps. lazy. indifference. A lack of awareness that Stocks and Share ISAs exist? I don’t know.

But if this you, then decided to do something different. ISAs mean you don’t pay income tax on dividends, and you don’t pay Capital Gains Tax on realized profits.

And with the Capital Gains tax-free allowance dropping to £3,000 from April 2024, and the Dividends tax-free allowance dropping to £500 from the same date, both are valuable concessions.

Pension: tax-free benefits, tax-free dividends – and tax rebate

ISAs are not the only mass market tax shelters. The same goes for private pensions such as SIPP, stakeholder pensions, etc.

Anyone can take out a SIPP or a stakeholder, and benefit from seeing their pension protected income and profits free of income tax and Capital Gains Tax.

Even better, pension contributions – under current tax law – still benefit from tax rebates at the highest marginal rate. Every year, there are fears that these important benefits will be withdrawn or reduced, but so far this has not happened.

So just because you already have an employer pension, don’t imagine you can’t also have a SIPP or stakeholder pension – investments, like an ISA, where you make investment choices, and strengthen your future. Even modest savings will grow over time, while reducing your tax bill in the meantime.

Bed & ISA, Bed & SIPP

Hopefully, you’ve taken advantage of the last few months of your £12,570 annual Capital Gains Tax free allowance to crystallize your gains and move them into a tax shelter such as an ISA or SIPP. This year, as I said, the tax-free allowance is £6,000 – and next year, £3,000.

Most investment platforms offer facilities such as ‘Bed and ISA’, or ‘Bed and SIPP’, where non-ISA investments are liquidated and the proceeds moved to a tax shelter.

£12,570 – the former Capital Gains Tax-free allowance – allows enough scope to sell and shelter, but this year’s £6,000 allowance and next year’s £3,000 allowance are more restrictive. You will be forced to move more slowly, so as not to trigger taxable capital gains. Acting now, this year, makes sense.

Bottom line

Good investment. You know that; I understand. Through investments, we make the future more secure, build a buffer against adversity, an income stream, and – in the long run – a more comfortable retirement.

Post-pandemic, and post-Truss, public finances have been stretched. The chancellor must act, and taxes must rise. Again: you know that; I understand.

But these same taxes can prove to destroy your wealth, robbing you of your profits and income.

So don’t delay – secure your prosperity today.