In order to build your wealth in the most efficient way possible and shelter your money from tax, you can invest through what is known as tax wrappers.
In light of this, this article will take you through two prominent tax wrappers – individual savings accounts (ISAs) and private pensions – and explain why these can be beneficial opportunities for investing and growing your wealth.
What is an ISA?
An ISA is an account that allows you to invest or save your money, while sheltering your money from tax – hence why they are known as tax wrappers.
The amount of money you can save in an ISA while still being sheltered from tax, is known as the ISA allowance limit. In the current tax year (2022/2023) the ISA allowance is £20,000.
This means you can save up £20,000 of tax-free savings in an ISA each year, and this applies to all four types of ISA:
- Cash ISAs
- Stocks and shares ISAs
- Lifetime ISAs
- Innovative finance ISAs
How ISAs can improve your finances
ISAs can be beneficial for your finances in a variety of ways, including:
- Sheltering your wealth from tax – The biggest benefit of ISAs is that you can save money in an account, sheltered from any tax liabilities. This is great for preserving as much of your wealth as possible, and saving for the future.
- Maximising your family allowances – ISAs can be beneficial for families, as you can maximise your allowances between each individual’s ISA to meaningfully boost a family’s financial outcome. With spouses, for instance, this means your allowance effectively doubles to £40,000, factoring in both your limits together. And children can invest up to £9,000 a year in a junior ISA (a JISA).
- Diversifying your investments – You can invest up to £20,000 tax-free, across all four types of ISA, but only funding one of each type per tax year. This helps with diversification. For example, a stocks and shares ISA allows you to benefit from the potential of stock market growth, returns which are sheltered from capital gains and income tax.
What is a private pension?
The second tax wrapper we’ll cover here is a private pension. This is one way of saving money into a pension pot for when you retire.
When you set up a private pension, any contributions you make will usually be held in the form of a pension fund, which can consist of assets like shares, bonds, property, or cash. You can often decide on which assets you prefer, based on the risk levels and potential returns of each.
As of the current tax year, you can pay up to £40,000 of tax-free contributions each year, and you have a lifetime allowance of £1,073,100 – the total amount you can store in your pension pot while being sheltered from tax.
How can a private pension improve your finances?
A private pension can benefit your wealth in ways such as:
- Funding your retirement – Personal pensions allow you to shelter as much of your savings as possible from tax, so you have a sufficient pension pot to fund your retirement lifestyle. Upon retirement, you can take out 25% of your pension as a tax-free lump sum.
- Maximising your wealth – A wealth management service can offer a personal pension, to help you optimise your money and manage your wealth tax-efficiently. They can also consolidate your current pensions for you into one accessible pot.
- Flexible contributions – With a personal pension, anyone can contribute towards this tax wrapper. For instance, if you’re out of work, your spouse can offer some of their income for your pension, making the most out of your tax-free allowances.
With the right approach to your investments, tax wrappers can be an efficient way of sheltering your money from tax, and building your wealth for your future goals. Talk to a financial adviser now, to see how you can benefit from tax wrappers.
Please note, the value of your investments can go down as well as up.
