Want to make your money work harder? Here are five must-know ways to start | Personal Finance | Finance

Creating wealth takes a lot of hard work but ensuring your money then works hard for you is vital. Preserving your wealth and growing it can be an even bigger challenge as the impact of our complex tax system – capital gains tax, dividend tax, income tax and inheritance tax – on returns can make big dents if it is not managed properly.

Having an investment strategy that suits your circumstances and risk level is key to building up wealth. But it’s also important that you understand the tax implications on any gains, making certain you have the smartest investment strategy in place and the best game plan for generating tax efficient income. Tax efficiency is about structure, not speculation – utilising ISAs, pensions and tax allowances can drastically improve your financial outcomes. Careful planning will mean you get to keep more of what you earn and grow your wealth more efficiently.

One of the simplest ways to help reduce your tax liability is to shelter returns from income tax and/or capital gains tax that are above the allowances. Using your ISA allowance and that of your spouse/partner is a crucial first step.

The annual limit is £20,000 per person and there’s a choice of account types from Cash ISA to Stocks & Shares ISA, Lifetime ISA and Innovative Finance ISA.

There’s no income tax or capital gains tax on any returns. Investing in Stocks & Shares can protect your assets against dividends tax and capital gains tax.

This is one of the most tax-efficient investments for higher-rate taxpayers. You can receive 20% to 40% tax relief on contributions, depending on your income bracket and growth is tax-free within the pension.

You can pay in up to the annual allowance of £60,000 and receive tax relief on contributions. Although this is tapered and you might have a lower tax-free pension allowance if you earn more than £260,000.

The annual CGT allowance has been reduced to £3,000 and it can be wise to plan disposals of assets in small chunks each year to take advantage of the allowance.

This can include Bed and ISA where you sell an asset, use the proceeds to fund an ISA and repurchase inside the ISA wrapper.

Other things to consider are spousal transfers – transferring assets to a spouse to double the CGT allowances.

The IHT threshold (nil rate band) is £325,000 per person, plus £175,000 for a main residence passed to a direct descendant. Amounts over this are taxed at 40%.

Making use of gifting allowances (£3,000 per year and small gifts), trusts, life insurance trusts and AIM shares (alternative investment market shares) can help to reduce the IHT bill.

There are various investments that come with decent tax benefits and the chance to earn longer-term growth. This is to encourage people to invest in small enterprises.

Although these are higher-risk investments as they are in businesses in their early stages – and typically only suitable for those with higher incomes and a bit of spare cash.

Despite being higher risk investments, they appeal to many investors due to the tax benefits and the chance for their money to do some good and help smaller firms.

These include the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs).

SEIS – is at the beginning of a new company’s journey. Typically, just an idea, seed level investment. It is the riskiest, as high numbers of companies will fail. But the government awards investors 50% of their capital back.

EIS – invests in firms a little further along their journey. Those with a proven concept but still in the early stages and still with a lot of risk. The government awards a 30% income tax break.

Both of these offer the potential for growth in wealth, rather than an income – it is too early to get any income.

VCTs – are still deemed risky but it is investing in bigger companies and investments are pooled, so the risk is spread. They offer the same tax breaks and an income yield of around 5% tax-free dividends.

By understanding how different types of income are taxed, making use of available allowances and wrappers can help improve your net returns.