a to z of finance

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A is for Allowances. Income tax is levied on taxable income, which is total income less allowances. In 1996-97, individuals can earn pounds 3,765 (pounds 3,525 in 1995-96) as a personal allowance. Married couples can claim a further pounds 1,790 (pounds 1,720 in 1995-96) allocated between them to suit themselves, usually to the higher earner, but the tax relief on that is only 15 per cent - in other words, a standard-rate taxpayer will actually be docked 9 per cent tax.

Individuals over 65, however, have a tax-free allowance of pounds 4,910 in 1996-97 (pounds 4,630), and married couples can earn a combined pounds 3,115 (pounds 2,995) extra on which 15 per cent relief is given. At the age of 75 the allowances edge up slightly more, to pounds 5,090 (pounds 4,800) tax-free, plus a further pounds 3,155 (pounds 3,035) for a couple, on which 15 per cent relief is given.

Single parents with dependent children and widows in the first two years after bereavement are entitled to a further pounds 1,790 (pounds 1,720) on which tax relief is 15 per cent. Blind people are entitled to an extra pounds 1,250 (pounds 1,200) tax-free.

The interest on a mortgage of up to pounds 30,000 for your main residence is also eligible for tax relief, but this also is only given at 15 per cent (for example, if the mortgage rate is 7 per cent the interest on a pounds 30,000 mortgage would be pounds 2,100 and the tax relief pounds 315 for all taxpayers). After deducting all sallowances, the first pounds 3,900 of taxable income is taxed at 20 per cent in 1996-97, the next pounds 21,600 at 24 per cent.

B is for Bonds and also for Banks and Building Societies. Bonds are financial obligations that entitle the holder to a specific financial annual return in all circumstances, unlike shares which entitle the holder only to a share in the profits. Bonds are issued by the British Government, by foreign governments and international organisations such as the World Bank, by commercial companies and utilities seeking to raise money. Most agree to pay a set rate of interest (some are index-linked) and to repay the capital in full at a set time in the future - for example, Treasury 8 per cent 2009 or United Mexican States 16.5 per cent 2008 or British Gas 8.75 per cent 2025.

These bonds are traded and prices go up and down according to how attractive their interest payments look relative to returns and risks on offer elsewhere, and how near they are to their maturity date.

Lump-sum investments with insurance companies are also called bonds, although some of them are invested in the shares and property as well as fixed interest securities, and do not pay a set dividend, nor can they normally be bought and sold. They usually have generic titles like income bonds, growth bonds, and guaranteed stock market bonds.

BANKS used to divide their services between taking deposits and making loans on the one hand and providing money transmission services, which allowed customers to draw out and pay in cash and transfer money by using cheques. Building societies were restricted to taking deposits from savers and lending money for borrowers specifically to buy homes.

The distinction only began to break down within the past 20 years, when the building societies broke into the money transmission business and started issuing cheque books, making personal loans and raising up to half the money they need in the London money markets to supplement the flow of personal savings, while banks went into the mortgage business.

Banks still have greater freedom, especially to raise money wherever they choose and lend to companies as well as individuals. To compete, building societies have started converting from mutual societies owned by their members into banks, and the trickle is becoming a flood. Most smaller societies have come out against conversion, but their members, including borrowers as well as savers, are increasingly attracted by a free hand-out of cash and shares to persuade them to vote for a conversion to banking status or takeover by a bigger financial institution.

Both banks and building societies are traditionally safe places to invest, however. Banks are regulated by the Bank of England and if banks go bust, investors can claim compensation of up to 90 per cent of any deposit of up to pounds 20,000 from the bankers compensation scheme. Building society accounts are similarly covered for up to 90 per cent of losses on amounts of up to pounds 20,000. Customers can take complaints about poor service and negligence to the Banking Ombudsman (Tel: 0171-404-9944) and the Building Societies Ombudsman (Tel: 0171-931-0044).

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