Capital Gains Tax (CGT)

One major consideration when investing is tax, you may be liable to pay Capital Gains Tax (CGT) when you sell investments for a profit. You do have an exemption before you pay CGT of £3,000 and once you exceed this exemption if you are a basic rate taxpayer you will pay 18% tax and if you are a higher or additional rate taxpayer you will pay 24%.

Tax can impact investment returns over the long term but by using tax-efficient savings vehicles like ISAs and Lifetime ISAs (LISAs) can reduce tax on gains.

Individual Savings Accounts (ISAs)

An Individual Savings Account (ISA) is a tax-efficient savings account that can hold cash or investments, with returns exempt from UK tax. You can have as many ISAs as you want, as long as you don’t contribute more than £20,000 each tax to your ISAs in total.

There are two main types of ISA:

Stocks and Shares ISA: : Invests in stocks or shares, making it suitable for long-term savings. Plan for at least five years to mitigate short-term volatility. You can also hold other assets like bonds within an ISA.

Cash ISA: Offers a fixed interest rate with potential for safer, though limited, growth. Interest rates are often lower than inflation.

Most ISAs can be used for any of your savings’ goals, but the government have also introduced a specific type of ISA to help you save for your first home or retirement.

Lifetime ISA (LISA):

Designed to help save for a first home or retirement, a LISA also provides tax-free growth. You can pay up to £4,000 into a LISA each year (this forms part of your overall £20,000 allowance), and this attracts a 25% contribution from the government which can attract up to £1,000 each year until you turn 50. A LISA can be opened when you are between the ages of 18-40 and can be used to make up a deposit for a first home or to be drawn after you have turned 60 designed to support your retirement. LISA’s are available as both stocks and shares or cash ISAs.

If you draw from a LISA for any other reason than buying your first home or at age 60, you will be subject to a 25% charge. For example, if you made 1 year of maximum contributions then you would have £5,000 in total. Made up of £4,000 + £1,000 government support. If you were to Withdraw that deposit for any other reason not mentioned above, you’d be let with just £3,750 (£5,000 - 25% = £3,750).