Almost half of investors do not understand how their investments are taxed, despite significant tax changes being just weeks away.
FTAdviser can exclusively reveal that more than a third of Britons find it challenging to use tax-efficient investment vehicles, such as Isas, and young people in particular struggle to understand tax.
A survey of 2,000 investors by online investment platform Shojin, taken at the start of the year, found:
- Just two out of five thought their investment strategy was tax efficient.
- 35 per cent found it “challenging” to use tax-efficient investing vehicles.
- Young investors fared even worse: over half of the 18-34 age bracket struggled.
Moreover, the research also suggested that two-thirds of Britons do not use a financial adviser to monitor their tax efficiency.
Retail investors have already been struggling to make their investments tax-efficient, Shojin suggested, even as chancellor Jeremy Hunt is set to bring in a raft of changes to tax rules in the UK for the new financial year on March 15.
As decided in last year’s Autumn Budget, capital gains tax exemption will halve in April and again next year, making investors face the tax at lower levels of profit. The dividend tax threshold will also halve twice.
But people do not understand this, prompting some advisers to call for stability, rather than more changes.
“The less change, the better,” said Tim Morris, adviser at Russell & Co, concerned that the upcoming Spring Budget could complicate tax rules for investors even further if Hunt introduces a limit on pensions’ tax-free cash allowances.
“Pensions is definitely the big one,” Morris said: investors rarely understand the tax relief benefits associated with pensions set up by their companies.
“The fact that less than half of investors believe their money is invested tax efficiently and only a third are using an adviser suggests much more needs to be done by the entire industry,” said Tom Selby, head of retirement policy at AJ Bell. “This is particularly important in a world where millions of households are facing an inflation-induced squeeze on their budgets.”
No time to pay attention
But the survey’s figures might be less a result of investors’ understanding and more a consequence of investors not having enough time to pay attention, said personal finance analyst Alice Haine at BestInvest.
“Experienced investors will be keeping an eye on their portfolio and reevaluating it, checking that it’s tax-efficient, but some – particularly DIY investors – might leave their money to fester over time, and not realise that they're missing out on making their investments as tax-efficient as possible,” she said.
The ongoing economic slowdown will also have its effect, as 37 per cent of respondents said tax efficiency will rise in prominence in their investment strategies.
The sentiment was even stronger among young investors aged 18-34: over half said they would prioritise tax efficiency more. Morris was surprised by this, though, saying that older investors are more likely to feel the changes to capital gains and dividend taxes.
Fiscal drag will see a “tremendous tax burden” fall on retail investors’ shoulders after April, Haine said. Investors “really need” to pay attention to what their investments are doing now. “It’s a taxing time,” she said.
