Tax Efficient Savings

We seem to be taxed on just about everything these days, and one thing that gets many people hot under the collar is having to pay tax on their savings when they have generally already been taxed once on it as income.

The first port of call for anybody who has some savings is normally the ISA (Individual Savings Account). The basic problem is that even now that they have been “simplified”, investors can still get confused because an ISA can include Cash where your money just goes up, and Investments, be it shares or corporate bonds, where your money can go down as well. This is why it is so important to get Independent Financial Advice to make sure that you fully understand what you are taking out and that it suits your needs.

You can invest up to £ 7,200 this tax year into an ISA, and up to £ 3,600 can be in cash. The proceeds are free of personal taxation. Budget changes increased these limits from April 2010, the over 50s will benefit from the increases from October 2009.

Cash ISAs can be moved so it is always worth keeping an eye on the interest rates to get the best returns and don’t forget non tax payers can get their interest paid tax free even in a normal deposit account.

Investment linked ISAs can play a very important role in peoples’ longer term savings plans and their retirement income. As they enjoy preferential tax breaks, they may be suitable for those willing to take more risk in order to build up a capital sum for the future. Many people decide to save a regular monthly amount and this can be sensible in times where the markets are likely to be so volatile in the short term. They are often used as an excellent source of additional pension saving.

Many pensioners rely on getting income from their investments to boost their income and ISAs are particularly well placed for this. Again great care needs to be taken when choosing these income plans as the highest income might not mean the safest capital and getting advice can really pay dividends.

An ISA isn’t the only tax efficient way of saving. There are Friendly Societies where you can save regular amounts to build up capital sums for the future although the amount is limited to £25 a month.

For those people lucky enough to pay higher rate tax there are investments where you can avoid paying immediate higher rate tax and for those in retirement, buying an annuity can be a highly tax efficient method of generating income.

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