(01295) 660 571

Churchlands, Banbury, Oxfordshire, OX17 1LN

Nigel Wearden IFA

Philip T. English I.F.S LTD

How Tax Affects your Investment Returns

How Tax Affects your Investment Returns

Tax can only reduce your investment returns, but by considering what taxes you pay, and how and when you pay them, you can make a considerable difference on what’s left in your pocket.

1) How are your savings/investments taxed while they are invested?

2) How are your savings and investments taxed when you take the benefits?

3) What is your personal or family tax situation at the time you invest or when you take your gains?

The first question relates to the internal tax treatment of the investment (how the fund is taxed while it is working for you) and is discussed in more depth in the Tax Drag On Returns section. In this article, I focus on addressing questions two and three: the external tax treatment of an investment (when you take your income or gains) and finally, your personal and family tax status both when you invest and when you take the benefits.

As an example of how your personal tax status may govern your choice of investments at the start of your plans, and when you eventually take the gains from these, we can compare the tax treatment of a pension contribution for a higher-rate or additional rate taxpayer with that of an ISA. The sort of pension I am considering here is a money purchase policy and not a final salary scheme.

You will receive tax relief at your highest marginal rate on any contributions made into a pension. That is to say, if you were a higher-rate or additional rate tax payer you would have 40 or 50 per cent more going into your pension (assuming it is a gross payment) than if you were to invest the same amount of earned income into an ISA: you would have suffered tax on the latter, already reducing the amount you can invest.

The next question to address if we are to follow this line of thought and compare the benefits of a pension to an ISA for a higher-rate taxpayer is how they would be taxed when they receives the gains.

Many higher rate tax payers become basic rate tax payers (20 per cent) when they retire or semi-retire, therefore, they benefit from 40 or 50 per cent tax relief on their pension contributions. In other words, their pension fund could be almost twice the size it would have been at the start of the plan than if they had invested in an ISA on a like-for-like basis because they started with a larger fund as a result of the tax relief they enjoyed. If they were to become a basic-rate taxpayer, as many higher rate tax payers do when they retire or semi-retire, they would only have to pay 20 per cent tax liability when they take their pension income. Furthermore, under current legislation, they can take 25 percent of their pension funds as tax-free cash.

Clearly, for a higher-rate or additional rate taxpayer the pension vehicle would (all things beings equal) potentially produce a better income for the retiree in the scenario outlined above, particularly over the long term, than the equivalent investment in an ISA. This is just one example of tax planning when considering savings, investments and pension planning.

There are numerous other considerations when deciding which route to take. These depend on your objectives, personal and financial circumstances, attitudes, values and timescale, both when you commence contributions and when you take benefits.

If you have a question, or would like to arrange an initial meeting without cost or obligation to ascertain if I can help you with your taxation and financial planning, please contact Nigel on (01295) 660571 or request a call-back.

Nigel Wearden

Nigel Wearden

Nigel has a wide experience of pensions, investments and taxation issues, and provides advice on these matters to individuals, companies and partnerships.

Having worked extensively in the financial sector, he now feels he has found his niche within the company, where he excels at providing bespoke financial solutions to suit his clients’ circumstances and attitudes towards risk.

Nigel began his financial planning career in the 1990s with Britannic, having previously run his own business, before studying History and Economics at the University of Warwick as a mature student.

Philip T. English Ltd.

Philip T. English Ltd.

Philip T English International Financial Services Limited was established in 1972, making it one of longest standing advisory firms in the country. Nigel joined the company in 2006.

Based in Chipping Warden, on the borders of Oxfordshire, Northamptonshire and Warwickshire, Philip T. English advise clients throughout England.

In the nearly four decades it has been advising clients on their financial planning, the firm has become known for its expertise and integrity. It was this fantastic reputation that attracted Nigel to join the firm.