Tax Basics |
|
Your Money > Tax Articles > How to save...
|
By Danny Cox
A banker is someone who lends you an umbrella when the sun is shining and asks for it back when it rains. And boy, is it raining. In response, the Government has taken debt off the banks and saddled the nation with it. The national debt has soared and we, the taxpayer, now face paying it off. This means one thing - taxes will have to rise. However, there is something you can do to protect your investments; if you act now. ISAs An Individual Savings Account (ISA) is a tax shelter in which you can protect cash and investments from tax. Cash ISAs are just like a deposit account. Your capital is guaranteed and the interest is tax free. Stocks and Shares ISAs allow you to take higher risks. Stock market investments do fall in value as well as rise, so you could get back less than you invest. However over the longer term funds and shares have the potential to produce significantly higher returns. Within ISAs you pay no capital gains tax on any gains and no further tax on the income. You can invest up to £7,200 each tax year (so husband and wife can save £14,400 a year between them) and withdraw your money whenever you like. Even if current interest rates are low, this won't be for ever and if you have used your ISA allowance you will be perfectly placed to enjoy the tax advantages. If you are worried about the stock market, you can invest up to £7,200 into cash pending investment later. This is not the same as a Cash ISA, as the interest is not tax free. However, it means that you are taking advantage of this year's ISA allowances without committing to stock markets - yet. SIPPs With a SIPP you have more restricted access to your money, but that's its strength. Your money is ring fenced to provide for your retirement - from age 55 (50 until 2010). In return the Government offers generous tax relief. So a SIPP offers all the same tax advantages of an ISA and the tax relief means that £10,000 could effectively cost you as little as £6,000. You can contribute as much as you earn into pensions if you are employed or self employed - effectively up to a maximum of £235,000 gross. Even if you have no earnings or you don't pay tax you can invest £2,880 and the taxman will still add £720. The exact rate of tax relief available with all these tax shelters will depend on your exact circumstances.
It is estimated that UK taxpayers who fail to use their tax shelters are paying almost £1 billion more tax than they need. It has never been simpler to open an ISA and/or SIPP. Just pick up the phone, go online with your debit card and you can apply in just a few minutes. If you are unsure of the best course of action for your particular circumstances, then you should seek advice or you may find our website useful to research some more. ISAs and SIPPs are at the heart of planning your finances. This year, perhaps more than any other year, shielding our savings from the taxman is even more important. Danny Cox, Hargreaves Lansdown | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||