We never get to spend our gross income because income tax and national insurance contributions can make a big dent in it.
The Old Testament prophet Haggai described it well when he said ‘ You earn wages, only to put them in a purse with holes in it.’
This is especially true for those paying higher and additional rates of tax.
Investing is much the same. We have to face the headwinds of poor investment performance; various charges taken from our investments; and tax deducted from the capital growth and income.
These are all a drag on the investment performance. As with those who design racing cars we need to reduce the drag that these headwinds cause as much as possible.
There are a number of investment products that can help us in this. However, we must be careful that we ‘don’t let the tax tail wag the dog’. Whilst reducing tax on our investments is important it is not always the most important consideration. For example many people hold large amounts in cash ISAs, no doubt because they are free of tax. However, keeping well in excess of an emergency fund in cash does not help to build up funds in excess of inflation over the long term.
There are a number of taxes that can be a drag on an investment portfolio and it is well worth getting at least a basic understanding of when these apply and how their effect can be reduced. In this respect for further information please see the links below.
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.