People discussing building wealth or investing often discuss the latest top stock pick or crypto trend. How to approach investing to minimise the tax burden is rarely discussed.
Now we are not talking here about tax evasion. That is avoiding paying legitimate tax when it is due. We are talking about legitimately arranging your financial affairs to minimise tax and are used by the rich to arrange their tax affairs legally.
There are five reasons why most people should look to do this:
- Reason #1: It reduces the amount you need to pay in tax each year
- Reason #2: Although potentially small amounts, this can compound over time to make a significant difference
- Reason #3: It can make as big a difference as which stocks/funds/bonds you choose
- Reason #4: If you adopt this strategy and automate it builds wealth at a faster rate as you sleep
- Reason #5: If arranged correctly, you can reduce your inheritance tax burden when passing wealth on to your family in the future.
Want to know more? Then read on…..
Where should I invest my money?
In simple terms, your money is put into an account or investment vehicle such as a pension, ISA, unit trust etc. These are termed wrappers and have different tax advantages. So which wrapper should I use, and in what order?
When looking at your financial plan, you should look to put money in these wrappers or, as I like to call them, buckets. The main buckets you can use are as follows :
Putting money into a pension is hands down the most tax-efficient investment method. In the UK (provided you have already paid income tax), the money you put in a pension automatically gets a 20% uplift. So £300 invested automatically becomes £375.
If you are a higher rate taxpayer (Income >£50K or an additional rate taxpayer>£150k), you can also claim back 20–25% in your tax return. This represents a significant uplift…