All about tax wrappers

Tax wrappers are accounts that shield your money from unnecessary tax. But what are the different types of tax wrapper, how do they work and which ones should you be looking to take advantage of in the 2021/2022 tax year?

Pensions

With more than two-thirds of the UK population saving into one, a pension is one of the most accessible and cost-effective tax wrappers around. All pensions are designed to pay you an income in retirement and most are portable, able to move with you to different companies and providers. The government offers several incentives to ensure you use a pension to prepare for life after work, including tax relief on your pension contributions. There are three main types of pension.

Defined benefit Employer pension Personal pension

Very few employers still offer these final salary pensions, which are based on your earnings and years of service. You and your employer pay contributions into a pension scheme, usually arranged via your employer. Personal pensions, such as Self-Invested Personal Pensions (SIPPs), allow you to choose your investments from a range of assets.

20%

TAX RELIEF

40%

TAX RELIEF

45%

TAX RELIEF

Pensions offer tax relief at 20%, 40% and 45% depending on your tax band. No capital gains tax (CGT) or income tax is charged on gains within your pension. Savings can usually be passed on with no inheritance tax (IHT) or income tax if you die before 75.

Individual Savings Accounts (ISAs)

ISAs offer tax-free savings and investments so that you can get more for your money.

ISA JISA LISA

£20,000

Amount that can be paid in per year

ISAs hold cash, stocks and shares or both and don’t attract CGT. You can pay in up to £20,000 a year. Dividends on your ISA investments don’t count towards your £2,000 dividend allowance.

£9,000

Amount that can be paid in per year

This amount can be invested in a Junior ISA (JISA) for anyone under the age of 18. They can access it after their 18th birthday. It’s a good way to gift money and shelter it from CGT and income tax.

Bonds

Offshore and onshore bonds can be used as tax wrappers by people who have maximised their pension and ISA allowances, or those who might not be able to maximise these due to salary or contribution restrictions.

20%

TAX

0%

TAX

Onshore Offshore

With onshore bonds tax is generally paid at 20%. You can withdraw 5% of premiums each year tax deferred and there is no CGT on gains. They are usually set up as life assurance policies and you may pay tax when certain events occur, like when the last ‘assured life’ dies.

Offshore bonds are not liable for UK tax on investment growth but tax may be due if you repatriate funds back to the UK. 5% of premiums can be withdrawn every year for 20 years without immediate tax liability and the bonds can help reduce the IHT payable on your estate.

£4,000

Amount that can be paid in per year

PLUS 25%

BONUS

If you’re saving up for a new home you can pay up to £4,000 a year into a Lifetime ISA (LISA) and receive a 25% bonus. This also counts towards your £20,000 annual ISA limit.

General Investment Account

A General Investment Account (GIA) is not a tax wrapper but can be used to pay any fees and charges for your investments, leaving the maximum amount invested in your pension and ISA. Investment in a GIA is subject to income tax and CGT.

Find out more

To check that you are making the most of your annual tax allowances, speak to your financial planner or portfolio manager.