Bit of surplus cash? Here’s how to invest tax efficiently….

So, you have a bit of surplus cash and you want to make sure it is invested as tax efficiently as possible… What about Stocks and Shares?

1. Share-based investments

You could buy shares… These could be shares from a private or, if you knew what you were investing in, a public (plc) company such as BT, Apple or even Facebook etc.

If you own shares, you may get income in the form of dividends.

Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.

If you have an investment fund that is invested in shares (these are usually arranged through an Independent Financial Adviser), then you may get distributions that are taxed in the same way as dividends.

In this current tax year, there is a tax-free Dividend Allowance of £5,000 available to all taxpayers (this tax free allowance will fall to £2,000 in April 2018).

Dividends above this level are taxed at:

  • 7.5% (for basic rate taxpayers)
  • 32.5% (for higher rate taxpayers)
  • 38.1% (for additional rate taxpayers)

Any dividends received within a pension or ISA are unaffected and remain tax-free.

Basic rate payers who receive dividends of more than £5,000 need to complete a self-assessment return.

2. What about Stocks & Shares held in an ISA?

Generally speaking, stocks and shares ISAs are useful if you pay income tax at a higher or additional rate. However, it’s good idea to weigh up the pros and cons if extra charges are involved.

Dividends received on shares within an ISA will remain tax free and won’t impact your dividend allowance. Also, any profit you make when selling investments in your Stocks and shares ISA is free of Capital Gains Tax.

Where the investments in your stocks and shares ISA do not pay dividends, but instead pay interest (for example, government and corporate bonds), the interest paid remains tax-free.

Remember to use up your annual ISA allowance which is £20,000 this tax year.


So, in summary. If you have a few thousand spare and you were comfortable with the level of risk that Shares represent (knowing that the value can go down as well as up!), then putting up to £20,000 in shares within an ISA represents a very tax efficient way to invest as there is no income tax on the dividends earned and there is no capital gains tax on any increase in value of the shares held. You could make investments in the shares of individual companies yourself if you knew what you were doing, or you could point your money towards an IFA or even an investment giant like Aviva who have managers to help your investment grow.

LeeP Accountants

Helping you keep more of your money