Top tips for saving tax

Transfers between spouses and civil partners are free of IHT, and so IHT will not be due if you leave your assets to your partner. Of course, this may merely postpone the problem until the last surviving partner dies, leaving behind a hefty IHT bill due on his or her estate for beneficiaries to pay.

There are a whole host of ways in which an IFA can help you minimise the amount of IHT your heirs will face. For example, it may be possible to arrange your life insurance in such a way that the proceeds remain outside your estate, and can be used to meet the IHT liability arising from other assets.

Tax advantages

Life insurance is not only a way of protecting your family, but can also be a tax-efficient way to save for the future.

Some life policies are structured as bonds, which allow you to fund the policy with a single lump-sum investment and if you want you can draw a regular income. Within certain limits this income is free of immediate tax and if you are a basic rate payer, may remain free of all tax.

Offshore life insurance bonds, based in tax havens like Jersey or the Isle of Man, can be used to defer UK residents' income tax until the investor falls to a lower tax bracket. Although not suitable for everyone, these products can be used by investors with £5,000 or more to invest.

Due to the additional complexities of offshore taxation, should you decide to use offshore bonds, it is vital that you get all the details of the arrangement right, so be sure to ask an IFA to help you.

Personal pensions

Pensions are a particularly good product for tax-conscious investors, because they boost the value of every £1 you invest – as you receive tax relief of at least 22%. Many other products make you wait until your first income payment – or even until the plan matures – before you see any tax benefits.

Pension contributions give you tax relief at the highest rate you pay. For a 40% taxpayer, that means for every £100 invested, the net cost to you is only £60. All pension policy holders can take 25% tax free cash regardless of what type of pension you may have.

You and your employer are able to pay up to one annual allowance for that tax year. This amount is up to 100% of your earnings and for the tax year 2006/2007 this allowance is capped at £215,00, with the limit set at £3,600 for low or non earners paying into a personal and stakeholder pensions.

There is now a limit on the money built up within your pension called the Lifetime allowance. In the tax year 2006/2007 this amount is £1.5 million.

Contribution annual allowances

2006/2007 £215,000
2007/2008 £225,000
2008/2009 £235,000
2009/2010 £245,000
2010/2011 £255,000

Lifetime allowance limits
2006/2007 £1.50 million
2007/2008 £1.60 million
2008/2009 £1.65 million
2009/2010 £1.75 million
2010/2011 £1.80 million

Don't delay starting a pension plan

If you feel confident enough, you also have the option of a Self-Invested Personal Pension (SIPP), where you can manage your own investments.

Every £1 you commit to a pension scheme now is particularly valuable, because that is the money which will have the most time to grow before you reach retirement age. Every month you delay starting a pension plan increases the amount you will need to save in the future to provide yourself with a reasonable income in old age.

What type of pension scheme should I invest in?

There are a number of different types of pension plans and schemes to choose from, and the plan appropriate to you will depend on your circumstances.

With few exceptions, employers with five or more workers on the payroll have to provide workplace access to a Stakeholder pension or an equivalent type of pension scheme and have a system to ensure contributions to the plan can be deducted directly from pay.

If you are employed and your employer runs an Occupational or Company pension scheme, it almost always makes sense to join it, especially if your employer makes contributions to your fund as well as you.

If your employer does not offer a Company pension scheme, or if you are self-employed, you should consider first a Stakeholder or Personal pension plan. If employed, you may be able to persuade your employer to make contributions too.

Savings

Existing PEPs and TESSA Only ISAs

If you already have money in a PEP or TESSA Only ISA, there is no need to close that account before you buy an ISA.

PEP money can continue to grow tax efficiently and you can also move money from one PEP manager to another without losing your investment's PEP status.

The Tax Exempt Special Savings Account was abolished in April 1999 and the last date you could have opened a TESSA Only ISA was 5th October 2004 . If you have a TESSA Only ISA you can transfer between providers to ensure you are benefiting from a competitive interest rate. This will not eat into your ISA allowance for the year.

Individual Savings Accounts (ISAs)

Every UK resident adult should consider taking out a tax-efficient Individual Savings Account (ISA).

ISAs replaced new investment in PEPs and TESSAs in April 1999, and currently allow you to save up to £7,000 a year without you having to pay tax on either the income the investment generates or its capital growth.

ISAs come in many different forms. You can choose ISAs that invest your money in a bank or building society account or a collection of stocks and shares. There are two main types of ISAs, one is a maxi-ISA and the other is a mini-ISA. You cannot mix and match maxi and mini ISAs. You can have either one maxi equity ISA or one or two mini ISAs for each tax year. Some ISAs meet stakeholder standards, indicating that they meet minimum charges on Charges, Access and Terms. Others do not.

The distinction between mini-ISAs and maxi-ISAs is an important one. Once you make your choice for the year of a maxi or mini-ISA, you are locked into that option for the remainder of the tax year, and plumping for the wrong one can dramatically cut the amount you are allowed to invest tax efficiently in an equity ISA.

Each type of ISA brings its own risks, and each will be suitable for a different type of investor. An IFA can help you sort out which type of ISA is right for you, and help you to avoid the many pitfalls which the choice of products present.

Your Choice of ISAs

*In future years maximum levels may reduce or increase.

Remember, you can have one maxi ISA investing in equities for each tax year or one or two mini ISAs as long as they are one of each type.

Bonds

When you buy a bond, you are lending money either to the UK Government or to a company in return for a fixed rate of interest.

Government bonds – known as “gilts” – are a particularly safe form of investment, because you know you will get your capital back at the end of the gilt's term, plus regular income payments at a predictable rate. Your money is at risk only if the UK Government defaults on its loans – which is very unlikely.

The bonds issued by individual companies work in the same way. If you select a big company with sound finances, the risk involved should be only a little higher than when buying a Government bond. Both corporate bonds and gilts can be wrapped inside an ISA to save tax. Investments like these are available as part of your equity ISA allocation for the year.

Investment

Capital Gains Tax (CGT)

The return you get from many investments divides neatly into two parts.

First, there are the income payments which the investment produces and, secondly, its capital growth. With an equity investment, for example, the shares you own will produce both income from the dividends and – with luck – capital growth from a rising share price. The Government taxes both elements of this gain, the first through income tax, the second through CGT.

CGT is charged at up to 40% if your taxable gains total over £8,800 (2006/2007). The longer you hold the assets, the less portion of tax you should pay due to what is known as “taper relief”. The taper reduces the amount of the chargeable gain according to how long the asset has been held.

There are financial products available that can help you minimise or defer your capital gains tax liability. Investing through Individual Savings Accounts is an ideal way to minimise the tax as no capital gains tax is paid on any profits made. There are other products available which offer capital gains tax breaks and an IFA can discuss the options with you.

Please note: All figures shown in this guide are those applying in the 2006/2007 tax year. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Ten tax-saving steps

Check out the tips below to see the kinds of areas where you could be saving tax.

1 Tax relief on pensions – Max up your pension contributions before the end of the tax year to gain generous tax relief and then benefit from the tax efficient treatment of pension funds.

2 An ISA's nicer – Individual savings accounts are great for tax breaks if you're saving or investing.

3 Use your other half – A higher rate taxpayer can save tax by transferring money into a lower earning – or non-earning – spouse's name.

4 Make a will – It's the only way to be sure your loved ones don't miss out on their inheritance, and to limit the tax paid on your estate.

5 Check your code – Make sure you have the right tax code or you could be paying over the odds.

6 Rent a room – Many people raise extra income tax-free by renting out a room in their home.

7 Don't get stamped on – You can save literally thousands if you negotiate with the person you are buying a house from to drop the price below stamp duty thresholds.

8 Company car? – Fill in a form to declare it as a taxable perk. Broadly speaking, the smaller the vehicle, the less tax you will pay.

9 Made a gain? – Make sure you take full advantage of your annual capital gains tax exemption limit.

10 Keep it in the family – The kids get their own personal tax allowance too, and you can set up tax-efficient trusts for children or grandchildren.

For further information on the subject contained in this guide, please contact your IFA.

If you do not already have an IFA, our Find an IFA website enables you to confidentially search for a list of IFAs in your local area. You can search for an IFA based on a whole host of criteria (including product, qualifications, gender and payment options) so you can be sure you'll find an IFA that meets your precise requirements.