Investing 101: What you need to know about tax efficiency and your investment options

Category: News
A woman looking at investments on her phone.

Investing may provide a useful way to grow your wealth, but getting started can be overwhelming. There are some important decisions to make when investing that could affect the outcomes and the tax you’re liable for, and we’re here to offer support.

Last month, you read about investment risk and what to consider when creating a risk profile. Now, read on to discover what your options are if you’re ready to start investing.

Shares v funds: What’s the difference?

Investing is filled with terms that can seem confusing. When you’ve looked at investing, you may have come across options like investing in shares or through a fund.

You may want to consider both options and understanding the differences is important.

Shares

When you purchase a share, you’re investing in a single company. When you hold a share, you essentially own a very small portion of the business. You can then sell the share at a later date and, hopefully, make a profit.

The value of shares is affected by demand. A whole range of factors can affect demand, from company performance and long-term plans to global economic conditions.

If you purchase shares, you’re in control and can decide which companies to invest in and when to sell them.

It’s normal for the value of shares to fluctuate, even daily. It can be tempting to try and time the market by buying when the price of a share is low and selling when it’s high. However, consistently timing the market is impossible. For most investors, buying shares to hold them for the long term often makes sense.

Funds

A fund pools together your money with that of other investors. This money is then used to purchase shares in a range of companies.

A fund is managed on behalf of investors. So, you wouldn’t make decisions about which companies to invest in or when to buy or sell shares.

There are lots of funds to choose from, so you can select an option that suits your risk profile and goals.

Funds can be a useful way to ensure your investments are diversified. As your money is spread across many companies, it can help create balance. When one company performs poorly, the success of another could balance this out. So, the value of your investment in a fund may be less volatile than individual shares.

However, the value of your investment will still rise and fall, and investing with a long-term plan is often advisable.

2 tax-efficient ways to invest and reduce your potential tax bill

When you sell certain assets and make a profit, you could be liable for Capital Gains Tax (CGT). This includes investments that aren’t held in a tax-efficient wrapper.

For the 2023/24 tax year, individuals can make £6,000 of gains before CGT is due – this is known as the “annual exempt amount”. If profits from the sale of all liable assets exceed this threshold, you could face a CGT bill. In 2024/25, the annual exempt amount will fall to £3,000.

The rate of CGT depends on your other income, but when selling investments, it can be as high as 20%. So, CGT may significantly affect your profits.

The good news is that there are tax-efficient ways to invest that could reduce your bill, including these two:

1. Invest through a Stocks and Shares ISA

ISAs provide a tax-efficient way to save and invest. For the 2023/24 tax year, you can add up to £20,000 to ISAs. The returns made on investments held in a Stocks and Shares ISA are not liable for CGT.

There are many ISAs to choose from. They can hold shares or you can invest in a fund through one. Usually, you can access your investments that are held in an ISA when you choose.

2. Use your pension to invest for the long term

If you’re investing with your long-term wealth in mind, you may want to consider pensions. Pensions are tax-efficient for two reasons.

  • First, you could claim tax relief on the contributions you make. This provides a boost to your contributions, which may grow further too, as tax relief would be invested alongside other deposits.
  • Second, your investment returns are not liable for CGT when held in a pension. Instead, you could pay Income Tax when you start to access your pension once you reach retirement age.

In 2023/24, you can usually add up to £60,000 (up to 100% of your annual earnings) into a pension while retaining tax relief – this is known as your “Annual Allowance”.

If you are a high earner or have taken an income from your pension already, your Annual Allowance may be lower. Please contact us if you’re not sure how much you can tax-efficiently save into a pension.

Before you start investing in a pension, one key thing to consider is when you’ll want to access the money. Usually, you cannot make withdrawals from your pension until you are 55, rising to 57 in 2028. So, your goals and other assets should play a role in deciding if investing more into a pension is right for you.

Contact us if you have questions about your investment portfolio

We can work with you to create an investment portfolio that suits your risk profile and goals. We’re also on hand to answer any questions you may have, from deciphering financial jargon to explaining tax-efficient options. Please contact us to arrange a meeting to talk about your investments.

Once you’ve set up an investment portfolio, how often should you review the performance? Why is ongoing advice useful? Read our blog next month to learn about managing investments on an ongoing basis.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

What our clients say

Having dealt with various financial advisers in the past, both Gary and Kate give a far more personal service and explain things clearly. They take the time to understand what we want from financial planning and they have the knowledge to advise us in a variety of different aspects. Although we have only been clients from just before retirement, I would have no hesitation in recommending them to anyone of any age and we have absolutely no regrets in switching to Lifeplan.

Colin, Nottingham

A client since 2016

On my first visit to Lifeplan several years ago, Gary took lots of time to get to know my background, my financial objectives and me. There was never any sales push or persuasion to get my business. We’ve always discussed issues; Lifeplan give me options and I decide what to do. I don’t feel any pressure to do anything that I’m not comfortable with. I feel as though we have a personal relationship, rather than just being another business transaction. That's why I’m happy with Lifeplan’s guidance with my life savings.

Anthony, Northumberland

A client since 2014

We have been with Lifeplan for a few years now. Kate has been brilliant in helping us understand our level of risk and planning for retirement. Before we spoke to Kate, it was always something we would just say we’d get around to at some point! It’s really important to have a plan and I feel more secure about our finances now.

Kate, Gateshead

A client since 2015

I initially approached Lifeplan as my parents had used them in the past. I received excellent financial planning advice, and as I am still quite young and newly-qualified, this was invaluable. I also approached Lifeplan to help me find a suitable mortgage and again they were fantastic. They took a lot of pressure off me by dealing with lenders as well as solicitors. First class!

Jamie, Northumberland

A client since 2017

I would recommend Lifeplan to anyone, as they provide an excellent and honest service.

Philip, Newcastle Upon Tyne

A client since 2016

Initially we were unsure about contacting Lifeplan, as we were wary that any advice given may not be impartial or even to our benefit. We needn't have worried as we now have every confidence in the planning, investments as well as the will and trust Lifeplan helped us with. It is a great relief knowing we can trust the people dealing with our finances. We are always kept fully up to date and have annual meetings where everything is explained in clear and concise ways.

June, Northumberland

A client since 2016

I have more in my pot now than when I retired 11 years ago, even though I joined at the beginning of the banking crisis.”

Derek, Consett

A client since 2011

I have had nothing but the best advice from Kate Boon over the last 12 years, in relation to mortgages, investments and financial planning for later life. She’s always down to earth in her approach, but very knowledgeable and a real professional.

Irene, Hexham

A client since 2012

In the five years that Lifeplan has looked after our investments, we have received an excellent, friendly, professional service, which has given us very satisfactory returns on our savings.

Pauline, Lanchester

A client since 2011

Our family has worked with Gary and Kate for many years and have built up a good trusting working relationship with this professional, efficient and caring company. We feel that they always consider our specific financial needs and provide advice accordingly. We definitely feel we are in safe hands with Lifeplan.

Julie, Consett

A client since 2010

As retirement approached, I was uncertain how to proceed. Advice from Lifeplan set us on the right track and we are now enjoying a very comfortable lifestyle. Good advice was provided regarding our wills and Powers of Attorney. We appreciate the guidance given and feel happy and secure in our retirement.

Albion, Tyne and Wear

A client since 2015

Lifeplan is an approachable and plain-speaking business. They are always there to help and assist, as well as provide annual reviews of my current finances and what can be changed to benefit me in readiness for retirement.

Ian, Newcastle Upon Tyne

A client since 2011

Kate is my financial consultant and has put a lot of work into my investments recently, making it very clear how it has been invested and where. This appears to be honest, up-to-date advice from someone who clearly knows the markets. I receive a pleasant, friendly service, in a nice modern office also.

Andrew, Hexham

A client since 2015

Lifeplan provides a friendly, professional service at reasonable cost. They are very responsive to any request I make and keep my portfolio of investments in line with my ongoing requirements. In 12 years of using Lifeplan, I have never had cause for concern.

Rob, Newcastle Upon Tyne

A client since 2006

Gary and Kate have been excellent in understanding our needs and requirements and have given first class advice. They have helped with our financial planning and setting up a trust to ensure our wishes for the future will be met. Nothing is too much bother for them and they provide an excellent service. My wife and I would happily recommend them.

John, Newcastle Upon Tyne

A client since 2014

When I retired, I wanted my capital to work for me. I was looking for a reasonable but realistic return on investment, but without a high risk. Lifeplan have provided me with just that. I have an annual review, where we have a frank discussion about current arrangements and any changes that Lifeplan may recommend. There is no jargon and things are explained in an understandable way. Plus, they are thoroughly nice people.

Harry, Newcastle Upon Tyne

A client since 2015

I found Gary and Kate very easy to speak to. They listen to your concerns and wishes, then give you the best options on how to invest moving forward. Their choices are always explained to you in understandable terms.

Edward, Hexham

A client since 2014

We have always been given helpful advice in a most professional manner. Every detail was explained fully in a way that was easily understood. We would have no problem in recommending Lifeplan to anyone wishing to invest.

Lisa, Newcastle Upon Tyne

A client since 2011

I'd tried several advisers prior to being introduced to Gary and was not happy with their service. Gary was instrumental in organising our pension information, so that we could understand what we were paying in to and why. Sounds easy, but we have had three previous advisers from some of the largest banks that could not do this. Since meeting Gary, we have successfully transferred our pension fund and original property in to a new scheme. In addition to this, Gary has successfully helped our company purchase a new property through our pension.

Bruce, Tyne and Wear

A client since 2013

Gary sorted out my pension by tailoring it to my own specific requirements. Until then, it was with large organisations and I really felt out of control with it. He explained technical financial terms well and I felt that he was not happy until he knew I fully understood all aspects of the business. There was no pressure from him and I always felt very confident that he was doing the best he could do on my behalf. He is fully qualified, takes pride in his job and in my opinion is impeccably trustworthy. His team is also very efficient, keeping me advised on all aspects of our business.

Henry, County Durham

A client since 2009

I was looking for financial planning and not just financial advice. Gary explained options in an easily understandable way and offered an alternative way of looking at the impact on different financial models. Initial advice was exactly what I wanted, and I am satisfied that the options I have now chosen are based on sound advice. I have decided to become a long-term client. What myself and my wife wanted was someone whom we felt we could trust with giving impartial advice on our future financial situation, and this we feel we have achieved with Gary

Colin, Nottingham

A client since 2016

I was recently widowed and wanted to simplify my financial affairs for my children should anything happen to me. Gary was very understanding of my needs and dealt with me patiently and in a simple way. I believe the products he recommended will benefit me.

H Walker, Newcastle Upon Tyne

A client since 2016

I contacted Kate to review my pension arrangements, with a view to changing my then pension provider. She helped and advised me on what I currently had, and helped find something better for my current and future needs. Obviously, it’s too early to say, but Kate clearly explained and showed me on the software what my pension could be like when it comes to retirement under various scenarios.

Richard, County Durham

A client since 2008

Redundancy required a re-think of my finances and future planning. Gary set up an investment portfolio following a detailed discussion, including provision of advice that met our needs. I am very pleased with the overall return over the last six years, balanced against the level of risk we were prepared to take.

Brian, County Durham

A client since 2012

Gary has developed a structured plan to ensure our funds will last in retirement. We are now deciding when to retire or reduce to part-time employment.

K Walker, County Durham

A client since 2010

We made an appointment to discuss the remortgage of properties. Kate understood our requirements and personally sorted the process in a very professional way from the start to a successful conclusion. She dealt with all matters, no matter how small.

Jim, County Durham

A client since 2016

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