Money: Investing for income - Don't give the taxman more than he's due

MANY savers approach the end of the tax year in April unaware that they have either not paid enough tax on their investment income or, just as likely, paid too much. Every year millions of pounds of income derived from people's savings is unnecessarily siphoned away by the Inland Revenue.

Making sure you get what you are entitled to is not always easy, but it's worth the effort. There are a number of ways to generate a healthy income from your investments without paying too much to the Inland Revenue.

First, ensure you make full use of the personal income tax allowances for both you and your partner. If your spouse is a non-taxpayer, a lot of money can be saved just by switching your savings into his or her name. An accountant or financial adviser should be able to help you on how best to do this.

The next place to turn to is the investments themselves. Basically, income earned from investments is treated in one of three ways: it is paid net of basic- rate tax; paid gross but still liable to tax; or it is tax- free.

Interest earned on bank and building society deposits normally falls into the first category - it is paid with tax deducted. However, if you do not pay income tax, you are able to claim back the deduction by keeping your statements and then filling in a simple form from the Revenue. You can also get paid gross in the first place if you fill in a form called an R85 which your bank or building society can supply.

With income from gilts and the dividends of any shares or unit trusts you might own, tax is deducted at source. Non-taxpayers, however, can claim that money back.

There are other forms of investment income that are paid without any tax deducted, some of which can provide an excellent source of regular income. But it is important to distinguish truly tax-free investments from those where returns are paid without deduction of tax but which must still be declared to the Revenue. Investments whose income is completely tax-free include the two types of National Savings certificates, suitable for the more cautious investor, and personal equity plans (PEPs).

Tax-Exempt Special Savings Accounts (Tessas) also boast completely tax- free interest, although the money must be tied up for five years to gain the tax perks.

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