Tax free ideas

If you want to reduce the amount of tax you pay why not follow some of the ideas outlined below.

ISAs

An ISA is an Investment Savings Account, and each year you are allowed to invest in either a Cash ISA or a Stocks and Shares ISA.
The annual subscription limit for the tax year 2008/09 was £7,200. You can use your whole allowance to invest in a Stocks and Shares ISA. Alternatively you can save up to £3,600 in a Cash ISA with one provider and the remainder of the £7,200 balance can be invested in a Stocks and Shares ISA with the same or a different provider.

You will also now be allowed to transfer any money held in a previous years Cash ISA into a Stocks and Shares ISA, without affecting your current allowance. If you still have a PEP (Personal Equity Plan) from the 1990s it will be renamed an ISA without affecting your annual limit for the tax year 2008/09.

The amounts you can save with an ISA are limited each tax year to those mentioned above. If you put £3,000 into a cash ISA with the 123Money Bank and then withdrew £1,000 to meet an unexpected expense you are not allowed to replace the £1,000 in the same tax year year, instead you have to wait to the following tax year as you are deemed to have utilised your ISA allowance for that year.

Premium Bonds

Premium bonds are an investment but rather than paying interest Premium Bonds offer you the opportunity to win tax free prizes if your premium bond number is selected. The minimum purchase is £100 which provides 100 Bond numbers and hence 100 chances of winning a prize. The maximum number of bonds you can own is £30,000.

Any money you invest in Premium Bonds is 100% safe as they are backed by the UK government. You can cash in all or part of your bonds at any time.

Prize draws are held every month and there are two £1 million jackpots and, at the current odds over a million other cash prizes.

The disadvantage with Premium Bonds however is that you are not guaranteed to win anything and you could have earned interest on your money had you invested it elsewhere. However, at the same time you at least know the money is secure and can be withdrawn at any time without the risk of it going down in value.

Index Linked Savings Certificates

If you invest in Index Linked Savings Certificates the value of your savings moves in line with inflation and earns guaranteed interest rates. Index linked savings certificates guarantee that the value of your investment will outstrip inflation by linking its value to the Retail Price Index. This ensures it matches the rate of inflation and on top of this the pay a fixed rate on top and as they are tax free you get to keep all the money tax free.

You can invest any amount from £100 to £15,000 in each issue of Index Linked Savings certificates.

R85 Forms

If you are a non-taxpayer then in order for your bank or building society to pay you interest without deducting tax you need to complete an R85 form. These forms should be available from your bank or building society.

Spouses

If you have a spouse who is a non-taxpayer you could save money in their name and have them complete an R85 form allowing you to earn more money tax free. Similarly if you’re spouse is a lower rate taxpayer and you are a higher rate taxpayer you can save money in their name and although you will pay some tax on the savings it will be at the lower rate of tax.

Offset mortgages

An offset mortgage allows you to effectively receive interest on your savings tax free. As the interest rate charged by your mortgage provider is probably higher than those available on cash ISAs it does sound appealing. However, the mortgage providers who tend to offer these mortgages have generally charged a slightly higher rate of interest on these mortgages than for their more traditional mortgages and in these cases you are probably better advised to save more money by shopping around for a cheaper mortgage.

Capital Gains Tax

You are currently allowed to make a capital gain of £8,200 from disposing of shares and investments. Each individual has their own allowance therefore a couple can make a capital gain of £16,400 before they would have to pay any capital gains tax.

It is therefore possible to sell some of your assets and investments each year in order to take advantage of your annual capital gains tax allowance and hence save you paying the tax you would have incurred had you sold all your investments in the one year.

Children

If you have children there is no limit on how much money you can give or invest on behalf of them and the income is tax free as long as it is less than £100 per tax year.

Inheritance Tax

When you die, anything in your estate after allowable deductions worth over £312,000 will be taxed at 40%. Although that figure might seem quite high the rising cost of property has led to an increase in the number of people whose estates are taxable. It is therefore important that if you fall into this category that you start to plan a tax efficient  will as early as possible to prevent the taxman getting his hands on a large chunk of your estate at the expense of your nearest and dearest.

Pensions

In order to encourage us to save for our retirement the government offer to give us back 20% (for basic rate taxpayers) of the income tax we have paid on our pension contributions. If you are a higher rate taxpayer then this rate increases to 40% meaning that for every £1,000 you put aside for your pension the government will give you £400.

If you do not work and can afford to pay money into a pension fund then under a stakeholder pension you would also qualify for tax relief at 20%. This also includes children so if you are a parent and want to invest money for your child this is a good tax efficient idea. However, remember that the child will not have access to the money until they retire which is a long way off but at least you know you will have set them off along the correct path to having a decent pension in their retirement.