Equity funds, some managed and multi-asset funds, may fall into this category. Any interest that accrues in the fund will attract a corporate rate of 20 per cent and not be liable on the client.
To maximise the use of the various allowances (starting rate band for savings, personal savings allowance and dividend allowance), it may be worth considering individual funds as opposed to a multi-asset arrangement, or apportioning investments between married couples and civil partners accordingly.
Additionally, for clients that have fully used their allowances, funds taxed on a dividend basis can be more tax efficient, in that dividends are taxed at a lower rate than income.
Using all available pension and Isa allowances where possible will maximise tax efficiency.
Maximising allowances and exemptions
Maximising all these allowances and exemptions can provide up to £27,430 of tax-free income this tax year, subject to HMRC approval and personal circumstances.
In the below example, if we assume a 3 per cent yield net of charges, you can see the amount of capital required to provide the figure quoted above. Very useful for clients in retirement.
This is the equivalent to a circa £34,420 a year gross salary in most of the UK (Scotland will be slightly higher).
Summary
Using all the reliefs, exemptions and allowances at our disposal will help negate the overall tax burden.
As a reminder, if you are married, or in a civil partnership, utilising both partner’s allowances and exemptions is a good place to start.
Sheltering investments in appropriate tax wrappers to maximise tax efficiency as well as making increased contributions to pensions to help avoid tax traps is another suitable step.
Neale Smith is investment platform and technical specialist at Scottish Widows
