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High taxes are not good for those of us who save. British taxpayers now bear the highest tax burden of the post-war period, and part of that burden falls on savers and investors, who pay up to a maximum of 28% on capital gains or 39% on dividends. And with the biggest problem facing governments being how to raise more tax, generating passive income seems harder than ever.
Secure accounts
But there is a silver lining to all this. A proposed plan to help plug the black hole in the country’s finances – capping the size of stocks and shares ISAs at £100,000 – appears to have fallen by the wayside. No minister has talked about capping ISAs since the election, despite serious concerns about rising taxes, and I am hopeful that this is a sign that my ISA is safe.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Criticism of the Stocks and Shares ISA is mainly about its generosity. With an annual deposit limit of £20,000, I can't argue with that, but such a high limit also benefits small savers.
A windfall from an inheritance or something similar? Put twenty thousand pounds into the ISA at once. Is inflation rising? The high deposit limit has a protective effect against tax drag effects. Even those who start with nothing and can only save 100 pounds a month could build up a nest egg of over 200,000 pounds.
Where to start? Artificial intelligence wouldn't be a terrible place to start. A saver starting out today and armed with a bit of knowledge might wonder how to take advantage of the impending AI revolution. Well, one of the most interesting British entrants is RELAX (LSE: REL), a data analytics company.
Transformer
One of its largest segments is the legal division, which offers products to help lawyers sift through mountains of legal jargon quickly and easily. The firm has already launched Lexis+AIa “AI Legal Assistant”.
If AI is the transformative effect that many claim, then RELX could be one of those stocks that does the same. In fact, its stock has already doubled in value over the past three years.
There are also dangers to any stock. One of the reasons I don't currently own it is that its products are aimed at lawyers, doctors and academics, fields in which I have no experience.
Of course, the best part is that your money snowballs thanks to compound interest without taxes cutting into your returns.
A 30-year investment period with a 9% return would turn £100 a month into £207,929. At that point, it would be time to think about withdrawing passive income through dividends or selling shares, and since I remembered to do it all in my ISA, that would be tax-free too.