The vast majority of income-from-investment seekers are retired and as such are entitled to benefit from a larger personal tax allowance. However, this additional allowance is increasingly eroded the more taxable income you earn.
Although the starting rate of tax for pensions and earned income is now 10 per cent, the tax rate for income from interest on savings is still 20 per cent (from 25 per cent in the 1995-6 tax year). With some astute planning, however, it is always possible to reduce your tax bill.
Use tax-free investments
Although the abolition of PEPs and Tessas came as a blow to many, it is still possible to generate a tax-free income from any existing PEPs and Tessas you hold as well as from the new Individual Savings Account.
An ISA is the umbrella term that includes investments in shares, investment or unit trusts or corporate bonds, as well as insurance-linked investments, and deposit accounts.
Some fund managers favour the investment trust ISA to counter the increase in advance corporation tax, as many investment trusts are now trading at substantial discounts to net asset values, so those who buy now will see the underlying portfolio yield enhanced.
Get the timing right
That is, the timing of investment to maximise tax breaks. Many people like nothing more than trying to beat the end-of-season tax sale. But research has suggested that savers who left investing in personal equity plans until the last day of every tax year since their launch could find themselves out of pocket by up to pounds 23,000 compared with those who had invested on the first day. The same is true of the CAT-marked ISA.
Exploit tax allowances
Assets can be divided between husband and wife to make the most of both personal allowances. The redistribution of assets may even cause one member of the couple to fall into the lower tax bracket. For example, if your partner is not working, he or she will be able to claim gross interest rates from bank or building society accounts if everything is put into that person's name, up to the personal allowance of pounds 4,335.
Remember that you don't have to be married to claim the married couple's allowance as cohabitees can also claim it for one last tax year and assign it to whoever is the highest-rate tax payer.
Use your capital gains allowance
As well as using investments for a regular income, you can meet one-off calls on your money through capital-stripping - realising growth by cashing in some of your investments. In the current tax year, you can realise pounds 7,100 in capital gains before tax.
Are National Savings an option?
Tax-free National Savings products are safe and good value for top-rate income taxpayers but not for non and low-rate taxpayers. They should find investments that pay higher rates and reclaim the tax.
The 10-year savings plans offered by freindly societies allow every person over the age of 18 to save up to pounds 25 per month (pounds 300 per annum) and the growth is tax free together with a tax-free payout.
Seek tax advice
If you have an independent financial adviser that you have used and trusted and you feel comfortable with on taxation issues, there is probably no need to seek advice elsewhere. But if you have no adviser, it would be wise to contact The Chartered Institute of Taxation, the leading professional body for British taxation specialists. There are 10,000 chartered tax advisers in the UK.
For a list of chartered tax advisers in your area, contact Linda Mullen, The Chartered Institute of Taxation, on 0171-235 9381.