Ben Yearsley: How can you reduce the Treasury's take?
Saturday 13 March 2010
With less than two months to the probable election date, the outcome is still up for debate. The polls indicate a hung parliament, but a majority result remains a possibility. One thing is certain, though: this country is in a pickle. A budget deficit of 13 per cent of GDP has to be paid for somehow, and there is only so much extra borrowing the gilt market can take.
So ignore the current rhetoric: both major parties would raise taxes and cut spending in their post-election Budget. I also wouldn't be surprised to see income taxes rising and, for some, the abolition of higher rate tax relief on pensions.
In short, things will be tough, and anything you can do now to reduce your taxable income and boost your tax-free income could be extremely valuable. So what are your options?
The first place to start is the individual savings account, or ISA. There are two types, cash ISAs (for those preferring safety) or stocks and shares ISAs. Over-fifties can currently put £5,100 into each annually, and for under-fifties the limits are £3,600. Alternatively, you can invest the combined allowance in just the stocks and shares component.
Many people underestimate the importance of ISAs. While rates on cash ISAs might look tiny today, what happens if interest rates go to 10 per cent in a few years? A larger tax shelter could become valuable in maximising the interest you receive.
It is similar with stocks and shares. With income of 4 per cent per annum from an equity fund and 5 per cent from a bond fund you could be receiving a valuable income stream that doesn't need to be declared on your tax return and doesn't affect any age-related allowances.
Even those of modest means should consider investing in ISAs. Investing £100 a month at 7 per cent annual growth gives you a pot of approximately £17,000 after 10 years.
Remember, if you don't use your ISA allowance you lose it, and you now only have three weeks to make use of this tax year's allowance.
Pensions are also an excellent, tax-efficient means of saving, as tax relief is usually provided at your highest rate. If you are a basic rate taxpayer, basic rate tax relief is paid into your pension and higher rate taxpayers receive higher rate relief from a combination of this and repayment via a tax return. Furthermore, everybody under 75 (children included) is entitled to invest at least £2,880 into a pension each year and have £720 tax relief added – even non-taxpayers and those who aren't employed. Investment choice is similar to that of an ISA, so you can still pick the level of risk you want.
Whilst pensions are tax-efficient, their aim is to produce an income in the future which is taxable, effectively the opposite of an ISA, where you invest using taxed income but you receive tax-free income back. There is a long-running debate about whether ISAs or pensions are preferable in this regard, and I have no intention of settling it now. All I will say is that having both is sensible for most people.
For more adventurous investors with ISA and pension provision in place, Venture Capital Trust and Enterprise Investment Scheme are further "use it or lose it" allowances. With VCTs you can invest up to £200,000 per tax year and receive up to £60,000 back as a tax rebate. With the EISs, you can invest up to £500,000 per tax year and get back up to £100,000. The catch is they invest in small, sometimes embryonic, companies, so the level of risk is high. You are also tied into a VCT for at least five years, and at least three years with an EIS. All gains on VCTs and EISs are tax-free, as are dividends from VCTs. However, I would emphasise that whilst ISAs and pensions are suitable for the majority of investors, VCTs and EISs are only suitable for a minority.
Whatever your ability to save and attitude towards risk, there is a tax-efficient investment available. In the future there will be greater reliance on self-provision in retirement, so using your ISA and pension (and possibly VCT and EIS) allowances could be worthwhile in the longer term.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Stem cells that can kill cancer have been engineered by scientists
- 2 Ricky Gervais and Dame Judi Dench back campaign to stop Thailand dog meat trade
- 3 Russell Brand says he will 'probably' give up acting to focus on his revolution
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Queen's first tweet: Reply telling Her Majesty to 'f*** off' broadcast on BBC News
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Tony Blair 'says Ed Miliband will lose 2015 general election'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Putin: The US is to blame for almost all the world's major conflicts
Attacks on 'Ukip Calypso' show how skewed people’s priorities are
iJobs Money & Business
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village