An IFA can help you fight back against the taxman.
Introduction
Whether we’re
talking about the money we earn or the money our savings earn
for us, the taxman takes as much as £4 in every £10. But while
most of us dislike paying tax, three in every four of us bury
our heads in the sand instead of doing anything to cut our
rising personal tax bills. In fact as a nation we waste a
staggering £7.9 billion each year by not taking tax action.
And yet, when it
comes to your savings and investments, a few easy tax-planning
measures can dramatically cut the tax you pay, giving a healthy
boost to the returns you and your family get.
Each year we waste
an average £160 per taxpayer in unnecessary payments and missed
opportunities. So if we’re prepared to squander this much
through our own lack of planning – and higher rate taxpayers
will waste much more besides – why do we get so wound up about
paying our TV licence, car tax and other similar levies? The
answer is simple – we can see these taxes going out, but it’s
often much harder to identify the areas where we’re wasting
money ourselves.
This booklet will
help you get to grips with the main issues involved in saving
tax, everything from the benefits of Individual Savings Accounts
(ISAs) to pensions planning. You don’t need to be a financial
genius to understand the basic principles, but by seeing a
qualified independent financial adviser (IFA) you can see in
detail how they apply to your unique financial situation, now
and in the future – and ultimately decide what’s right for you.
David Elms
Chief Executive
IFA Promotion Ltd.
Life insurance
Life policy payouts
The payouts from the
majority of life insurance policies are free of personal tax.
But that doesn’t mean you can forget about the issue of tax
altogether where your life cover is concerned.
When you die, the
proceeds of your life insurance policy are paid to your
beneficiaries, and may be subject to inheritance tax (IHT). This
tax is charged at 40% on estates worth more than £300,000
(2007/2008) – including the value of your home – and could land
your heirs with a big bill. Every £300,000 of taxable assets you
leave behind could create an IHT bill of £120,000 for your heirs
to pay.
Transfers between
spouses and civil partners are free of IHT, and so IHT will not
be due if you leave your assets to your partner. Of course, this
may merely postpone the problem until the last surviving partner
dies, leaving behind a hefty IHT bill due on his or her estate
for beneficiaries to pay.
There are a whole
host of ways in which an IFA can help you minimise the amount of
IHT your heirs will face. For example, it may be possible to
arrange your life insurance in such a way that the proceeds
remain outside your estate, and can be used to meet the IHT
liability arising from other assets.
Tax advantages
Life insurance is
not only a way of protecting your family, but can also be a
tax-efficient way to save for the future.
Some life policies
are structured as bonds, which allow you to fund the policy with
a single lump-sum investment and if you want you can draw a
regular income. Within certain limits this income is free of
immediate tax and if you are a basic rate payer, may remain free
of all tax.
Offshore life
insurance bonds, based in tax havens like Jersey or the Isle of
Man, can be used to defer UK residents’ income tax until the
investor falls to a lower tax bracket. Although not suitable for
everyone, these products can be used by investors with £5,000 or
more to invest.
Due to the
additional complexities of offshore taxation, should you decide
to use offshore bonds, it is vital that you get all the details
of the arrangement right, so be sure to ask an IFA to help you.
Personal pensions
Pensions are a
particularly good product for tax-conscious investors, because
they boost the value of every £1 you invest – as you receive tax
relief of at least 22%. Many other products make you wait until
your first income payment – or even until the plan matures –
before you see any tax benefits.
Pension
contributions give you tax relief at the highest rate you pay.
For a 40% taxpayer, that means for every £100 invested, the net
cost to you is only £60. All pension policy holders can take at
least 25% tax free cash regardless of what type of pension you
may have.
You and your
employer are able to pay up to one annual allowance for that tax
year. This amount is up to 100% of your relevant earnings and
for the tax year 2007/2008 this allowance is capped at £225,000
with the limit set at £3,600 for low or non earners paying into
a personal and stakeholder pensions.
There is now a limit
on the money built up within your pension called the Lifetime
allowance. In the tax year 2007/2008 this amount is £1.6
million.
Contribution annual
allowances
2007/2008 £225,000
2008/2009 £235,000
2009/2010 £245,000
2010/2011 £255,000
Lifetime allowance
limits
2007/2008 £1.60
million
2008/2009 £1.65
million
2009/2010 £1.75
million
2010/2011 £1.80
million
Don’t delay starting
a pension plan
If you feel confident
enough, you also have the option of a Self-Invested Personal
Pension (SIPP), where you can manage your own investments.
Every £1 you commit
to a pension scheme now is particularly valuable, because that
is the money which will have the most time to grow before you
reach retirement age. Every month you delay starting a pension
plan increases the amount you will need to save in the future to
provide yourself with a reasonable income in old age.
What type of pension
scheme should I invest in?
There are a number
of different types of pension plans and schemes to choose from,
and the plan appropriate to you will depend on your
circumstances.
With few exceptions,
employers with five or more workers on the payroll have to
provide workplace access to a Stakeholder pension or an
equivalent type of pension scheme and have a system to ensure
contributions to the plan can be deducted directly from pay.
If you are employed
and your employer runs an Occupational or Company pension
scheme, it almost always makes sense to join it, especially if
your employer makes contributions to your fund as well as you.
If your employer
does not offer a Company pension scheme, or if you are
self-employed, you should consider first a Stakeholder or
Personal pension plan. If employed, you may be able to persuade
your employer to make contributions too.
Savings
Existing PEPs and
TESSA Only ISAs
If you already have
money in a PEP or TESSA Only ISA, there is no need to close that
account before you buy an ISA.
PEP money can
continue to grow tax efficiently and you can also move money
from one PEP manager to another without losing your investment’s
PEP status.
The Tax Exempt
Special Savings Account was abolished in April 1999 and the last
date you could have opened a TESSA Only ISA was 5th October
2004. If you have a TESSA Only ISA you can transfer between
providers to ensure you are benefiting from a competitive
interest rate. This will not eat into your ISA allowance for the
year.
Individual Savings
Accounts (ISAs)
Every UK resident
adult should consider taking out a tax-efficient Individual
Savings Account (ISA).
ISAs replaced new
investment in PEPs and TESSAs in April 1999, and currently allow
you to save up to £7,000 a year without you having to pay tax on
either the income the investment generates or its capital
growth.
ISAs come in many
different forms. You can choose ISAs that invest your money in a
bank or building society account or a collection of stocks and
shares. There are two main types of ISAs, one is a maxi-ISA and
the other is a mini-ISA. You cannot mix and match maxi and mini
ISAs. You can have either one maxi equity ISA or one or two mini
ISAs for each tax year. Some ISAs meet Stakeholder standards
indicating that they meet minimum charges on Charges, Access and
Terms. Others do not.
The distinction
between mini-ISAs and maxi-ISAs is an important one. Once you
make your choice for the year of a maxi or mini-ISA, you are
locked into that option for the remainder of the tax year, and
plumping for the wrong one can dramatically cut the amount you
are allowed to invest tax efficiently in an equity ISA.
Each type of ISA
brings its own risks, and each will be suitable for a different
type of investor. An IFA can help you sort out which type of ISA
is right for you, and help you to avoid the many pitfalls which
the choice of products present.
Table 2: Your Choice
of ISAs
|
Type of plan |
Where your
cash goes |
Current
maximum* investment allowed in the tax year |
|
Cash mini
ISA |
Bank or
building society
deposit
account |
£3,000 |
|
Equity mini
ISA |
Equities,
bonds, unit trusts, OEICs, investment trusts, life
assurance |
£4,000 |
|
Equity maxi
ISA |
Equities,
bonds, unit trusts, OEICs, investment trusts, life
assurance |
£7,000 |
*In future years
maximum levels may reduce or increase.
Remember, you can
have one maxi ISA investing in equities for each tax year or
one or two mini ISAs
as long as they are one of each type.
Bonds
When you buy a bond,
you are lending money either to the UK Government or to a
company in return for a fixed rate of interest.
Government bonds –
known as “gilts” – are a particularly safe form of investment,
because you know you will get your capital back at the end of
the gilt’s term, plus regular income payments at a predictable
rate. Your money is at risk only if the UK Government defaults
on its loans – which is very unlikely.
The bonds issued by
individual companies work in the same way. If you select a big
company with sound finances, the risk involved should be only a
little higher than when buying a Government bond. Both corporate
bonds and gilts can be wrapped inside an ISA to save tax.
Investments like these are available as part of your equity ISA
allocation for the year.
Investment
Capital Gains Tax
(CGT)
The return you get
from many investments divides neatly into two parts.
First, there are the
income payments which the investment produces and, secondly, its
capital growth. With an equity investment, for example, the
shares you own will produce both income from the dividends and –
with luck – capital growth from a rising share price. The
Government taxes both elements of this gain, the first through
income tax, the second through CGT.
CGT is charged at up
to 40% if your taxable gains total over £9,200 (2007/2008). The
longer you hold the assets, the less portion of tax you should
pay due to what is known as “taper relief”. The taper reduces
the amount of the chargeable gain according to how long the
asset has been held.
There are financial
products available that can help you minimise or defer your
capital gains tax liability. Investing through Individual
Savings Accounts is an ideal way to minimise the tax as no
capital gains tax is paid on any profits made. There are other
products available which offer capital gains tax breaks and an
IFA can discuss the options with you.
Please note: All
figures shown in this guide are those applying in the 2007/2008
tax year. Thresholds, percentage rates and tax legislation may
change in subsequent finance acts.
Ten tax-saving steps
Check out the tips
below to see the kinds of areas where you could be saving tax.
1 Tax
relief on pensions – Max up your pension contributions before
the end of the tax year to gain generous tax relief and then
benefit from the tax efficient treatment of pension funds.
2 An ISA’s
nicer – Individual savings accounts are great for tax breaks if
you’re saving or investing.
3 Use your
other half – A higher rate taxpayer can save tax by transferring
money into a lower earning – or non-earning – spouse’s name.
4 Make a
will – It’s the only way to be sure your loved ones don’t miss
out on their inheritance, and to limit the tax paid on your
estate.
5 Check
your code – Make sure you have the right tax code or you could
be paying over the odds.
6 Rent out
your spare room – Many people raise extra income tax-free by
renting out a spare room in their home.
7 Don’t get
stamped on – You can save literally thousands in stamp duty by
buying in a disadvantaged area or by negotiating the purchase
price below stamp duty thresholds.
8 Company
car? – Fill in a form to declare it as a taxable perk. Broadly
speaking, the smaller the vehicle, the less tax you will pay.
9 Made a
gain? – Make sure you take full advantage of your annual capital
gains tax exemption limit.
10 Keep it in
the family – The kids get their own personal tax allowance too,
and you can set up tax-efficient trusts for children or
grandchildren.
For further
information on the subject contained in this guide, please
contact your IFA.
If you do not
already have an IFA, our ‘Find an IFA’ hotlines and website
enable you to confidentially search for a list of IFAs in your
local area. You can search for an IFA based on a whole host of
criteria (including product, qualifications, gender and payment
options) so you can be sure you’ll find an IFA that meets your
precise requirements.
If you are looking
for advice on personal finances call the
IFA Promotion
Consumer Hotline on 0800 085 3250.
If you are looking
for financial advice for your business call the
IFA Promotion
Corporate Hotline on 0800 085 3251.
Alternatively, for
both services visit our website at www.unbiased.co.uk
Printed guides
available:
-
Independent
Financial Advice for consumers
-
Independent
Financial Advice for businesses
-
Investment guide
-
Get saving guide
Printed factsheets
available:
-
Planning for
your family
-
A parents guide
to education fees planning
-
Ethical
investment – making money with a clear conscience
-
The basics of
offshore and expatriate finances
-
An introduction
to insurance
