Managing your tax liability is an important part of your financial plan. If you can reduce the amount you pay, you keep more of your earnings and can build wealth faster. This is especially important as a professional rugby player because your earnings could fluctuate when your playing career ends, so you will want to maximise your income while you can.
You might consider the Income Tax you pay on your salary, but you may not have thought about the tax you could pay when investing.
Depending on how you hold stocks and shares, you could pay Dividend Tax, which reduces the total growth you see from your portfolio. You might pay Capital Gains Tax (CGT) when selling investments for a profit, too.
Fortunately, there are ways to reduce the tax you pay on your investments, including a strategy called “bed and ISA”.
Read on to learn more.
Holding investments in a Stocks and Shares ISA shields them from tax
The tax treatment of your investments depends on the type of account you hold them in.
If you have stocks and shares in a General Investment Account (GIA), you could pay tax on dividends (a portion of the profits paid to shareholders by the company) you earn from them.
The first £500 is tax-free, then you will pay:
- 8.75% if you are a basic-rate taxpayer
- 33.75% if you are a higher-rate taxpayer
- 39.35% if you are an additional-rate taxpayer.
Also, the basic and higher rates of Dividend Tax will increase by two percentage points from 6 April 2026, so you could pay more in the future.
If you sell investments in a GIA for more than you paid for them, your profits could be subject to CGT too. The first £3,000 (your Annual Exempt Amount) is tax-free. Any further gains are taxed at:
- 18% if you are a basic-rate taxpayer
- 24% if you are a higher- or additional-rate taxpayer.
The rate of tax you pay depends on which Income Tax bracket the gains fall into. If a gain pushes you into the higher-rate bracket, you may pay some CGT at the basic rate and some at the higher/additional rate.
Fortunately, if you hold your investments in a Stocks and Shares ISA, you will not pay any Dividend Tax or CGT. There is no Income Tax to pay when withdrawing the funds, either.
This means you keep all your investment gains.
You can contribute up to £20,000 across all your ISAs each year, and using as much of this allowance as possible to invest could shield you from a significant amount of tax.
As this allowance resets at the start of the new tax year on 6 April, now could be a good time to start planning how you will take advantage of your ISAs.
Using “bed and ISA” could help you move investments into a tax wrapper
You might benefit from making any new investments through a Stocks and Shares ISA, but you might still have existing investments in a GIA.
To improve the tax-efficiency of these investments, you could consider a strategy called “bed and ISA”.
Essentially, this means selling your investments and then purchasing them again inside an ISA. Once you have moved your investments into an ISA, you can benefit from the tax advantages described above.
If you plan to hold dividend-paying investments for decades, transferring them into an ISA could save you a significant amount of tax over the years.
It is important to plan carefully as there are downsides to the strategy
While a bed and ISA strategy could reduce tax in the future, there are potential challenges to consider.
You are limited by your ISA allowance
When you execute a bed and ISA strategy for investments, you will use a portion of your £20,000 ISA allowance to re-purchase the stocks. If you hold more than £20,000 worth of investments, you might have to transfer them into an ISA over several years.
Additionally, if you are using a large percentage of your allowance to bed and ISA existing investments, this limits your ability to continue making new subscriptions.
As such, it is important to find a balance between moving existing investments into a tax wrapper and making further contributions to build your portfolio.
You could pay some tax when selling investments
When you initially sell investments in a GIA, with the intention of re-purchasing them in your ISA, you might pay CGT.
If the investments have increased in value since you purchased them, the normal CGT rules described above will apply to the sale.
In some cases, bed and ISA will still be a beneficial choice because the amount of tax you save in the future outweighs the CGT you pay now. However, you may want to speak with your adviser first to ensure you make an informed decision.
If investments fall in value, your options may be limited
Investments in a GIA may fall in value at certain times as markets fluctuate. When this happens, your options for bed and ISA may be limited. Selling and re-purchasing the investments now could mean you lock in those losses.
It’s important to consider the potential for losses when deciding if bed and ISA is a suitable strategy for you.
Get in touch
Bed and ISA could help you mitigate tax, but there are many pitfalls to navigate. At DBL Asset Management, we can help you explore this strategy and avoid any mistakes that could harm your overall financial plan.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.