|
|
| Make sure your savings beat the taxman |
|
By Sarah Modlock
The taxman is everyone's favourite charity. He must be because the few tax breaks we do get from our fiscal friend are often neglected and under-used with the consequence that he continues to fill his coffers at our expense.
Here's how to make sure your savings beat the taxman:
Know your limits....
If you save or invest money, you'll generally have to pay tax on the interest or income you get, but there are some savings and investments that give you a tax-free return. If you're on a low income, you might not have to pay tax at all. In the current tax year (2006-2007), the basic personal allowance - or tax-free amount - is £5,035. If you're aged between 65 and 74 this goes up to £7,280 and rises to £7,420 when you're over 75, providing your total income remains less than £20,100 a year.
|
Use your ISA allowance....
One of the most simple and popular ways to invest tax-free is with an ISA. Each tax year, you can invest up to £7,000 in a Maxi ISA or up to two Mini ISAs and you won't have to pay any personal UK income or Capital Gains Tax on any growth or income you earn.
Research from Alliance & Leicester Savings reveals that seven years after launch, myths and misunderstandings are still preventing British savers from taking advantage of the tax benefits of Individual Savings Accounts. Seven in ten Brits (71%) have savings and/or investments but almost half are losing out on the extra financial benefit of an ISA. In total last tax year, Brits missed out on a potential £424 million boost to their savings.
One of the first areas of confusion appears to be in understanding exactly what the benefits of tax-free savings really are. Only half of the savers questioned deemed not paying tax on their savings to be an important consideration when choosing a savings account whereas almost nine out of ten cited getting a good rate of interest as a key factor.
|
|
What doesn't seem to be widely understood is that if the average Briton put their annual ISA allowance of £3,000 into a cash mini ISA, they would save at least an additional £30 in tax each year. This may not sound much, but for a basic rate tax payer, who put the maximum away each year, this would amount to £840 so far - and would continue to increase each year.
Worryingly, some people are still being put off cash mini ISAs for some basic reasons. When Alliance & Leicester asked those who do not have a cash mini ISA the reasons why, a fifth said they just didn't really know what one is and one in six said they didn't understand the system. One in five don't think they have enough money to even open a cash mini ISA - yet you can open a cash mini ISA with as little as £1. Almost one in ten don't think they'd have immediate access to their money - yet lots of cash mini ISAs allow instant access to your funds.
'I find it concerning to note that there are many who believe that once you open an ISA, you're stuck with it,' says Alliance & Leicester's Mike Woodward. 'This is not the case, opening a cash mini ISA really is simple, as more than eight out of ten people we surveyed found and it's also simple to switch. If you're hard earned cash is currently sitting in an ISA paying a poor rate of interest, make sure you shop around and switch, to ensure you are getting the best deal available.'
Claim back if you can....
Banks and building societies usually take tax off interest at the rate of 20% before they pay it to you. But if your taxable income is less than your tax allowances you can register to have your interest paid 'gross' (without tax taken off) by filling in HM Revenue & Customs R85. You can also claim back tax you've paid on your savings when you didn't need to. Fill in an HM Revenue & Customs R40 form to make your claim.
Save for your children...
If your child was born on or after 1 September 2002 and is eligible for Child Benefit, you'll get a £250 voucher from the government (£500 if your income is below a certain level) to set up a Child Trust Fund. Once you've set up the fund parents, family and friends can add up to £1,200 to the account each year. There is no tax to pay on the CTF income or any gains (profits) it makes until your child reaches age 18.
Save for your retirement....
The government encourages you to save for your retirement by giving you 'tax relief' on pension contributions. Tax relief reduces your tax bill or increases your pension fund. When you retire, you can usually take up to 25% of your pension fund as a tax-free lump sum. Your regular pension income is then taxed in the same way as the rest of your income. Of course, set against the tax advantages are some more obvious disadvantages. There is the loss of flexibility because the fund is locked away until your retirement date. Also, the basic-rate part of the tax relief is added to your pension contribution, rather than returned to you; you won't get it back until you retire. There are also complicated restrictions on the amount you can invest. To add to the fun, the reforms of A-Day bring an upper 'annual allowance' and 'lifetime allowance'. Professional advice is recommended here.
Useful links:
|
|
|
|
