Save on tax and give yourself a pay rise

That usually reduces £100 of gross dividends to £66.25 or less in the hands of high earners. But if they pop precisely the same investments into an Isa for tax-free dividends, these investors can increase their income by at least £33.75. That’s a whopping 51 per cent extra.

What’s not to like? Well, neither of the above calculations takes any account of charges that might be imposed by the provider of the Isa tax wrapper. Hundreds of stocks and shares Isa options are available in this highly competitive market but none should levy charges that are unduly onerous. For example Hargreaves Lansdown, Britain’s biggest online investment platform, makes no charge at all to set up an Isa.

● Full disclosure: Ian Cowie’s share holdings

Then, assuming that shares are held in this wrapper, the annual fee is fixed at 0.45 per cent, capped at a maximum of £45 per year per Isa, regardless of how many shares are held or what their value might be. That seems pretty reasonable to me.

Cheaper options are available. The best deal for you will depend on factors including how much you invest, what you want to hold in the Isa (for example, there may be different charges for unit trusts) and how often you wish to buy or sell.

The important point remains the same, whichever provider you choose: Isas enable investors to award themselves a pay rise by receiving income without deduction of dividend tax. Unlike other tax shelters, such as pensions, there is no minimum age before you can draw cash out of an Isa, nor any maximum Isa value beyond which punitive tax clawbacks apply.

By contrast, I had to reach 50 years of age before I could draw any cash out of my pension. Since you ask, I used my first withdrawal to buy an old wooden sailing boat, which has been great fun for 15 years now. Who says saving and investment have to be boring?

Unfortunately, the minimum age before you can start enjoying your pension savings has subsequently been increased to 55 and there is speculation that this might be raised again soon. The government would much rather we went on working and paying tax than see us floating around having fun.

Similarly, the lifetime allowance or maximum value of a pension fund has been substantially reduced. But there is no cap on Isas where, in addition to tax-free income, any gains or growth in the capital value of investments is also tax-free.

Only a minority of investors pay capital gains tax (CGT) but more might be caught by it in the future. The explanation is that the annual allowance, or the value of gains outside Isas we are allowed CGT-free, was halved last year from its former level of £12,300 per person per tax year to £6,000, and will halve again to £3,000 in April 2024.

Taking all these factors into account, Isas are by far the most flexible tax shelter available to everyone who is willing and able to save and invest for a more enjoyable future. The question remains: what to put in them?

Personal circumstances will affect how long you intend to remain invested, your attitudes to risk and reward, and your preferences for income or growth or a mixture of both.

So what follows is not advice, still less any form of recommendation. It is merely the personal account of what works for one 64-year-old who has been investing in shares for 30 years and has survived several stock market shocks and a couple of crashes along the way.

The first point I would make is that, like the personal equity plans (Peps) that preceded Isas, a tax wrapper does not in any way reduce the risks inherent in stock market investment. Share prices can and do fall without warning. You might get back less than you put in.

Given these awkward facts, diversification is a simple and effective way to diminish the risk of investment. The idea is the same as the old adage about not having all your eggs in one basket.

So it makes sense to consider avoiding investing too much in any one company, country or currency. Fortunately, unit and investment trusts make it cheap and convenient to diminish risk because they automatically spread individual investors’ money over dozens of different underlying companies or, in the case of international funds, countries and currencies.

Younger investors, who may have decades of working life ahead of them, are more likely to favour investments with good prospects of generating long-term growth. But at my age it would be odd if I did not have one eye on life after work, so I prefer shares yielding decent dividends for my Isa. The idea is to generate tax-free income to pay for an enjoyable retirement.

The commodities giant, BHP Holdings (stock market ticker: BHP), is by far the biggest holding in my Isa — at the beginning of March it had a yield of 9.5 per cent dividend income even after its share price soared 30 per cent over the past year. BHP is one of the biggest miners in the world, producing copper, which is vital for electrification, iron ore and metallurgical coal, for making steel, and — a relatively new activity — potash for fertiliser.

BHP describes these products as “future-facing commodities” to distinguish them from its former activities in fossil fuels, such as oil and liquefied natural gas (LNG), which it sold to Woodside Energy Group (WDS) last year. I retained the “free” WDS shares we were given by BHP in my Isa, and bought some more, because I believe it will be a while yet before developed economies can get by without oil or LNG.

Looking forward to a cleaner, greener future, the investment trusts Gore Street Energy Storage Fund (GSF) and US Solar Fund (USFP) also feature in my Isa. The former specialises in industrial-scale batteries needed to smooth out fluctuations in solar and wind-generated electricity and both these shares yield more than 6 per cent dividend income.

Further diversification with decent dividend income is obtained from the self-descriptive BlackRock Latin American (BRLA) and European Assets Trust (EAT), plus the continental warehouse operator Tritax Eurobox (EBOX) and the marine leasing specialist Tufton Oceanic Assets (SHIP). At the start of March these investment trusts yielded 5.6 per cent, 8.2 per cent, 6.1 per cent and 7 per cent respectively.

It is important to beware that dividends can be cut or cancelled without warning. Here and now, my Isa generates more income than the annual salary I earned in my first two years working as a journalist and this small shareholder hopes for many tax-free pay rises in the future.