Tax efficient investments for Athletes.
As professional athletes in the UK enjoy success and significant earnings, they must also focus on securing their financial future beyond their sporting careers. One crucial aspect of achieving long-term financial stability is optimizing tax efficient investment strategies.
Fortunately, UK athletes have access to various tax-efficient wrappers that can help them minimize tax liabilities and grow their wealth. In this article, we will explore the different tax-efficient wrappers available to UK athletes, including pension funds (SIPPs), Individual Savings Accounts (ISAs), Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS), and Onshore/Offshore bond arrangements.
Tax Efficient investments
1. Individual Savings Accounts (ISAs)
ISAs are one of the most popular tax-efficient investment options in the UK. They come in different variants, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs (IFISAs), and Lifetime ISAs.
With an ISA, athletes can invest up to £20,000 annually (as of the tax year 2023/24) tax-free and enjoy the benefits of tax-free interest, dividends, and capital gains on their investments.
For athletes looking to save for their first home or retirement, the Lifetime ISA can be particularly advantageous, as it offers a government bonus of 25% on contributions up to £4,000 per year.
Advantages of ISAs for Athletes
Any income or capital gains generated within the ISA wrapper are not subject to income tax or capital gains tax.
ISAs offer various investment options, allowing athletes to choose investments that align with their risk tolerance and financial goals.
Unlike pension funds, ISA funds can be accessed at any time without penalties.
Disadvantages of ISAs for Athletes
The annual contribution limit for ISAs may not be sufficient for high-earning athletes looking to invest large sums of money.
No tax relief on contributions
Unlike pensions, ISAs do not offer tax relief on contributions, so athletes cannot claim back tax on their contributions.
2. Pension Funds (SIPPs)
Self-Invested Personal Pensions (SIPPs) are an attractive option for athletes who want to secure their retirement. With SIPPs, athletes can contribute up to £60,000 per year (or 100% of their income, whichever is higher) into their pension pot while benefiting from tax relief at their prevailing income tax rate.
This means that for every £1,000 contributed, basic-rate taxpayers can claim back £200, and additional-rate taxpayers can claim back £450. Moreover, investments made within the pension fund grow tax-free, and no capital gains tax is payable on any gains realized within the pension wrapper.
Advantages of SIPPs for Athletes
Generous contribution limits
Athletes can invest a substantial amount annually (up to £60,000 in the 2023/23 tax year), making SIPPs suitable for high-earning individuals.
Tax relief on contributions
Tax relief on contributions means athletes can save significantly on their income tax bills.
Wide investment choices
SIPPs offer a broad range of investment options, giving athletes the flexibility to create a diverse investment portfolio.
Disadvantages of SIPPs for Athletes
Funds in SIPPs are primarily for retirement and cannot be accessed before the age of 55 (going up to 57 after 6th April 2028) without incurring penalties.
Tax on withdrawals
While contributions receive tax relief, withdrawals in retirement are subject to income tax at the recipients marginal rate of income tax.
3. Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)
VCTs and EIS are designed to encourage investments in small and medium-sized enterprises (SMEs) by offering tax incentives.
Both schemes allow athletes to invest in early-stage companies and startups, aiming to support economic growth while benefiting from potential tax reliefs.
Athletes can invest up to £200,000 per tax year and receive a 30% income tax relief on the amount invested.
Any dividends and capital gains earned within a VCT are tax-free.
Athletes can invest up to £1 million per tax year and receive a 30% income tax relief on the amount invested.
EIS also offers capital gains tax deferral and exemption on gains made from EIS investments.
Advantages of VCTs and EIS for Athletes
High tax reliefs
The generous tax relief provides a significant incentive for investing in early-stage companies.
Potential high returns
Investing in startups can offer substantial returns if the companies succeed.
Disadvantages of VCTs and EIS for Athletes
Investing in early-stage companies carries a higher risk of failure, and investments may result in losses.
VCTs and EIS investments may have limited liquidity, making it challenging to access funds if needed.
4. Onshore/Offshore Bond Arrangements
Onshore and offshore bonds are life insurance contracts that can serve as tax-efficient investment vehicles for athletes.
These were once the tax wrapper of choice, but in recent years international investment bonds and collective investments have been favoured by many advisers and their clients. However, with recent capital gains tax changes due to the recent autumn statement, these could in fact be making a return to provide further tax planning opportunities. This is because capital gains tax is not charged within the bond arrangement.
Instead, income tax is paid within the bond at the basic rate (20%) on any income or growth.
Athletes can also make withdrawals of up to 5% per annum cumulatively without paying immediate tax on them.
Tax on any growth can then be deferred until withdrawals are made, potentially allowing athletes to withdraw growth without further tax liability.
Advantages of Onshore Bonds
Athletes can defer tax on growth, potentially reducing tax liabilities in the future.
Here you can withdraw up to 5% of the amount invested each year without incurring an income tax charge at that time, and the allowance can be carried forward each year if they don’t use it.
You can put their bond into a trust, which may allow the settlor to take income or make capital withdrawals from the bond, while any investment growth is free from inheritance tax, depending on the type of trust used.
Disadvantages of Onshore Bonds
Income tax on withdrawals
Withdrawals may be subject to income tax at the individual’s prevailing rate.
An onshore bond is not generally as tax efficient as an ISA. For example, nil-rate taxpayers cannot reclaim the corporate tax paid within the bond.
Similar to onshore bonds but established outside the UK, typically in locations like Ireland or the Channel Islands.
Can be beneficial for athletes with international tax planning needs.
Advantages of Offshore bonds
Capital gains tax
Offshore bonds are not subject to capital gains tax so capital gains can ‘roll up’ over time without any immediate tax charge.
Gains will be taxed as income but only once you access the funds. As such, whilst there is no relief on the way in, there is no tax to pay while the funds grow.
If you’re a higher rate taxpayer, it’s a great tool in the armoury. You can invest your money to achieve capital growth and re-invest dividends without having to pay any income tax, whilst you continue to earn income over and above the top rate.
Disadvantages of Offshore bonds
Future tax liability
However, it’s important to remember that, whilst there’s no immediate income tax to pay, there will be income tax to pay in the future.
In an ideal scenario, a higher rate taxpayer pays in and a non or basic rate taxpayer draws the money out.
As UK athletes plan for their financial future, utilising tax-efficient wrappers can be a smart strategy to protect and grow their wealth. Each tax wrapper offers unique advantages and disadvantages, making it essential for athletes to assess their individual circumstances, risk tolerance, and long-term goals before making investment decisions.
Consulting with financial advisors who specialise in working with athletes can help tailor a tax-efficient investment plan that suits their specific needs and aspirations. By harnessing the power of tax-efficient wrappers, UK athletes can create a solid financial foundation for themselves and their families long after their sporting careers come to an end.