Tax Wrapper

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

A tax wrapper is like a shell you put around your money, protecting it from certain kinds of tax with the specific benefits and rules depending on the wrapper type.

The money within the wrapper can then be invested in different ways - a simple savings account or invested in shares, bonds, funds, gold, real estate etc. The wrapper doesn’t generally change what you can invest in, it just changes the tax treatment and may come with certain limits. For example, you can't access your pension until you’re 55 (rising to 57 soon). 

The two main tax wrappers in the UK are ISAs and pensions. When you put your money into an ISA, any interest, dividends or capital gains within the wrapper are completely tax-free. With a pension, you get tax relief on the money going in and it grows tax free too, but you’ll pay some tax when you take it out at retirement. 

Understanding the uses of and differences between tax wrappers is a really simple way of making good money decisions.

Love Eleanor. xxx