With the end of the financial year in sight, it is time to start making sure you have invested into your ISA, as if you have not utilised your 2017/18 ISA allowance before the 6th April, it will be lost. Additionally, the same applies to anyone who has not made their pension contributions. This investment limit is not as straightforward as with an ISA; it is recommended to speak to a wealth management expert to understand more about this.
ISAs (Individual Savings Accounts) are tax-efficient investments on which you will not have to pay tax. For other investments, you may have to pay tax on the interest or dividends you earn, or on any capital gains made. By investing in an ISA, these taxes are not payable and therefore an ISA is an excellent way to invest to avoid paying additional taxes on the potential income and growth you could achieve.
This year’s contribution allowance is £20,000 per individual, which will remain the same for the 2018/19 tax year. There is no need to wait until the end of the year to make your ISA contribution, however, as if you make next year’s contribution in April, you get an additional 12 months of tax-free growth.
Like with ISAs, pensions are a tax-efficient investment which can grow without the constraints of tax. This will help your investments grow faster, as the gross compounding can make a significant contribution to your long-term investment growth. However, the biggest benefit of a pension is that you are able to claim tax relief on your contributions.
The tax relief on a pension contribution means that a basic rate taxpayer who contributes £800 into a pension will immediately see the value of their pension increase to £1,000. This represents a return of 25%. For additional and higher rate taxpayers, this increases to 60% and 82% respectively. Additionally, when it comes to drawing on your pension, you will receive 25% tax-free.