20 April 2010
First port of call for investments, is usually a stocks and shares ISA. You can invest in funds (the usual route) or hold assets including shares, corporate bonds and gilts, and you can invest up to £10,200 a year (minus any contribution you put into a cash ISA).
In tax terms, all gains or income generated are tax-free.
Pensions are an even more tax-efficient way to save with tax relief at 20% available, so a contribution of £80 effectively become £100 as the pension company claims £20 on your behalf. Higher-rate taxpayers can also claim back a further 20% through their self-assessment, although it becomes complicated if you earn over £130,000 p.a. Either way, you will at least end up with the 20% basic rate relief.
The really fun bit is that you don't even need an income to get the tax relief. A non-earner can pay in up to £2,880 a year and receive £720 in tax relief to bring their total contribution up to £3,600.
If you're married, it's also worth looking at both spouses' pension planning. So, rather than lump all the pension savings into one name and only take advantage of half the allowance, spreading pensions between you both can be very effective.
If you are employed, salary sacrifice is worth considering. This means that part of your salary is sacrificed and diverted to a benefit such as a pension contribution instead. For example, an employee earning £33,000 a year sacrifices £1,000 for a pension. This, effectively, only costs them £690 a year as they would have paid £200 in income tax, and £110 in national insurance.
Additionally, and particularly attractive if you are a director of your own company (and therefore technically employed) it saves the employer national insurance at 12.8%, equivalent to a further £128 saving.
Salary sacrifice is also even more attractive to anyone earning just over £100,000. A little understood fact is that the personal allowance is reduced at the rate of £1 for every £2 once taxable earnings hit £100,000. Effectively this means a potential tax rate of 50%.
And finally in this section, many people don’t know that you can choose when to take your state pension, which could also affect your tax bill. By deferring your claim you can either take an enhanced pension or a lump sum and a standard pension. The lump sum is taxed at your marginal rate, so by waiting until you are on a lower tax band, you could reduce your tax bill.