As a high earner, one of the most important aspects of building your wealth effectively is knowing how to make tax-efficient investments.
But how can this be achieved?
Read on, to learn what tax-efficient investing is and how you can incorporate it into your own financial plan.
What is tax efficient investing?
Tax-efficient investing is when you’re able to structure your wealth and investments in a way that shelters your money from as much tax as possible, and ensures tax-free allowances and exemptions are also used.
This can be best achieved through tax-incentivised wrappers for investments – i.e., pensions and individual savings accounts (ISAs) – that shelters your money from tax completely or up to a certain amount.
High earners can distribute their wealth into one or several tax wrappers (perhaps using some of their partner’s allowances, too), and structure their investments in a way that is best suited to grow their wealth.
This is key for effective financial planning and wealth management, as for the current tax year (2022/2023), those bringing in an annual income of over £50,271 will be charged a 40% income tax rate – for those earning over £150,000, this increases to 45%.
How can you become a more tax-efficient investor?
There are many different ways you can be more tax-efficient when investing, including:
- Seeking financial advice
When it comes to tax-efficient investing, one of the most vital steps you can take is to seek the expert advice of modern wealth managers.
These professionals have extensive knowledge about tax wrappers, personal allowances and investment opportunities, and will use their experience to help you create a detailed financial plan and achieve your financial goals.
More importantly, together, you can establish the approach and strategy you need to reach these goals.
An expert adviser can take into account your current financial circumstance as a high earner, and offer guidance on tax-efficient investments that are suited to your unique needs.
With tax-efficient investing – or any form of investing for that matter – a financial adviser can be pivotal.
- Investing in ISAs
One of the most popular forms of tax wrapper is an ISA, which can be especially beneficial for high earners.
An ISA allows you to save money every financial year, while being sheltered from tax. As of the current tax year, you can invest up to £20,000 in an ISA completely tax-free.
There are four types of ISAs for you to potentially invest in:
- cash ISAs
- stocks and shares ISAs
- lifetime ISAs
- innovative finance ISAs.
Each financial year, you can spread your £20,000 tax-free savings across as many of these four ISA types as you want, but only one of each type – for example, half in a cash ISA and half in a lifetime ISA, or a quarter in each ISA type.
Using the appropriate ISAs, you can shelter portions of your income each year from tax. As well as this, any gains from profitable investments in stocks and shares ISAs are free from capital gains tax (CGT), further protecting the value of your finances.
- Contributing towards a personal pension
A personal pension is another tax wrapper you can incorporate into your financial plan, while saving for your retirement.
Much like ISAs, pensions have an annual allowance that allows you to contribute every tax year while remaining sheltered from any tax liabilities – as of the current tax year, this is £40,000.
Pensions also have a lifetime allowance, which is the total amount you can have saved in your pension pot at any time, while still being tax-free – this is currently £1,073,100.
Once again, the expert advice of a modern wealth manager can help you to make the most effective contributions towards your pension, factoring in both the annual and lifetime allowance.
As a result, you’ll be able to shelter as much of your pension pot from tax as possible, and fund your desired retirement lifestyle – and any relevant goals you may have discussed with your adviser.
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Navigating the various taxes and maximising your allowances as a high earner can be complex, but by following this key advice – and more importantly, that of your expert adviser – you’ll have the best chance of making the most appropriate tax-efficient investments to grow your wealth.
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Please note, the value of your investments can go down as well as up.