Midweek Money: Claim your due from the taxman

Money to invest? Make sure you take advantage of the best deals. By Rachel Fixsen

WHY PAY more tax than you have to? If you are a higher-rate taxpayer, income on investments may be nearly halved by the Inland Revenue.

Financial advisers say we are still not making the most of tax-free savings opportunities generously created by successive governments.

"Obviously Peps and Tessas have been a big success story, but the bulk of money is still in banks and building societies," says Bryan Fisher, of independent Berkeley Financial Planning.

Tax Exempt Special Savings Accounts, or Tessas, are offered by banks, building societies and investment companies. You can invest up to pounds 9,000 and as long as your capital remains untouched for the full five-year term, interest is tax-free. You can withdraw the equivalent of net interest during the term without affecting the tax-free status. At the end of the term, you can re-invest in a follow-on Tessa.

You are allowed to have only one Tessa at a time. Depending on the provider, your minimum investment may be pounds 1 or the full pounds 9,000. Some allow you to make payments whenever you want; some demand regular monthly contributions; others insist on lump sum investments. Interest arrangements also vary.

Personal Equity Plans or Peps are basically tax-free wrappers for share- based investments and some types of bonds. Returns made are free of capital gains and income tax. UK residents over 18 is allowed to put pounds 6,000 into a general Pep plus pounds 3,000 a year into a plan that holds shares in just one company. A vast range of investments is available, and the charges levied can sometimes mean that tax advantages for basic-rate tax-payers are cancelled out. Typically a provider will charge 3-4 per cent initially and make a 1.5 per cent annual charge, but it is worth shopping around.

Peps are due to be replaced with Individual Savings Accounts (ISAs) next April. Pep investments can simply be transferred into an ISA. But the allowance will be lower: pounds 5,000 a year, or pounds 7,000 for the first year.

It is still worth taking out a Pep to make the most of this year's tax- free allowance, says Jim Preston, of Wesleyan Financial Services. "With the ISA, it's not 100 per cent certain what the Government will allow."

National Savings offers a range of tax-free products. Lump sums invested in fixed-interest Savings Certificates pay a fixed tax-free return over five years. If the investment is held for the full term, the current 46th issue pays 4.8 per cent a year. Index-linked Savings Certificates also run for five years tax free, but the rate of interest here moves in line with the Retail Prices Index each month.

Premium Bonds, also issued by National Savings, are more than an alternative to buying a lottery ticket. Many people see them as serious investments.

"We've seen a big increase in people with the maximum holding of pounds 20,000," says Carys Jones, of National Savings. "Over 130,000 people have got that much." With average luck and the maximum holding, you would win 10 pounds 50 prizes a year and three pounds 100 prizes. "And that's not including your chance of winning the pounds 1m jackpot."

One of the best tax-free savings opportunities is a pension. You get tax relief at your highest rate of tax, so for every 60 pence a higher- rate tax payer pays in, pounds 1 is invested.

Friendly Societies offer tax-free regular savings plans. You must keep the plan going for 10 years. The most you can invest tax-free is pounds 25 a month.

Just because a savings option is tax-free, doesn't necessarily mean it is a good investment. "Look at the underlying investment ... you can't let tax blind you," says Mr Fisher.

Wesleyan Financial Services: 0800 22 88 55. Berkeley Financial Planning: 01203 555240. National Savings: 0645 645000. `The Independent' free guide, `Making Your Investments Work for You', covers every aspect of financial planning. It is sponsored by Wesleyan Financial Services. Call 0800 1379749, or fill in the coupon on this page.