An IFA can help you fight back against the taxman

Introduction

Whether we’re talking about the money we earn or the money our savings earn for us, the taxman takes as much as £5 in every £10. But while most of us dislike paying tax, over four in every five of us admit to burying our heads in the sand instead of doing anything to cut our rising personal tax bills. In fact, as a nation we waste a staggering £10 billion each year by not taking tax action.

And yet, when it comes to our savings and investments, a few easy tax-planning measures can dramatically cut the tax we pay - giving a healthy boost to the returns you and your family get.

Each year we waste an average £191 per taxpayer in unnecessary payments and missed opportunities. So if we are prepared to squander this much through our own lack of planning – and higher rate taxpayers will waste even more – why do we get so wound up about paying our TV licence, car tax and other similar levies? The answer is simple – we can see these taxes going out, but it’s often much harder to identify the areas where we’re wasting money ourselves.

This brief guide will help you get to grips with the main issues involved in saving tax, taking you through everything from the benefits of Individual Savings Accounts (ISAs) to planning for your income in retirement tax-efficiently. You don’t need to be a financial genius to understand the basic principles, but by seeing a qualified independent financial adviser (IFA) you can see in detail how they apply to your unique financial situation - now and in the future and ultimately decide what’s right for you.

Karen Barrett
Chief Executive
Unbiased.co.uk

Life insurance

Life policy payouts

The payouts from the majority of life insurance policies are free of personal tax. But that doesn’t mean you can forget about the issue of tax altogether where your life cover is concerned.

When you die, the proceeds of your life insurance policy are paid to your beneficiaries and may be subject to inheritance tax (IHT). This tax is charged at 40% on assets over £325,000 (2010/2011) if you are single, and assets over £650,000 (2010/2011) if you are married or in a civil partnership. The assets which form the value of the deceased’s estate includes the value of their home, car, jewellery and any other possessions which could land heirs with a big tax bill. For every £325,000 of taxable assets above the threshold you leave behind could create an IHT bill of £130,000 for your heirs to pay.

An IFA is best-placed to advise you on how to mitigate inheritance tax and make sure your financial planning is as tax efficient as possible.

Transfers and gifts between spouses and civil partners are currently free of IHT, and so IHT will not be due if you leave your assets to your partner. However tax will be due eventually when the surviving partner dies if the value of their estate is more than the IHT tax threshold of £650,000.

There is 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 like bonds, which allow you to fund the policy with a single lump-sum investment and if you prefer you can draw a regular income. Within certain limits this income is free of immediate tax and if you are a basic rate tax payer it 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, providing tax relief of at least 20%. 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 at least 25% tax free cash regardless of what type of pension you may have.

You and your employer are about to pay up to one annual allowance for that tax year. This amount is up to 100% of your relevant earnings and for the tax year 2010/2011 this allowance is capped at £255,000 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 2010/2011 this amount is £1.8 million.

New Pensions limits

Contribution annual allowances
2010/2011 £255,000

2011/2012 £50,000

Lifetime allowance limits
2010/2011 £1.8 million

2011/2012 £1.5 million

Don’t delay starting a pension plan

If you feel confident enough, you have the option of a Self-Invested Personal Pension (SIPP). A SIPP allows you to manage your own pension investments through stocks, shares, bonds, unit trusts or even other assets such as property - all within a tax-efficient pension wrapper.

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 appropriate plan for 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 - as well as have a system in place 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 a Stakeholder or Personal pension plan. You may be able to persuade your employer to make contributions too!

Savings

Individual Savings Accounts (ISAs)

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

ISAs come in two different forms. You can choose ISAs that invest your money in a bank or building society account known as a Cash ISA or a collection of stocks and shares known as a Stocks and Shares ISA. Some ISAs meet stakeholder standards indicating that they meet minimum terms on charges, access and terms. It is important to understand that a stakeholder ISA is neither approved, nor its performance guaranteed, by the government.

There is an overall maximum investment limit for ISAs, and separate limits for each element. For this tax year 2010/2011 you can invest:

ISA type	Allowed in the tax year
Stocks and Shares ISA	Up to £10,200
Cash ISA	Up to £5,100
Combined maximum	£10,200

Both a cash ISA and stocks and shares ISA brings their 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 surrounding the choice.

What about the ISAs, PEPs and TESSAs I have previously invested in?

If you have invested previously in mini cash ISAs, TESSA-only ISAs (TOISAs) or the cash component of a maxi ISA, these will have now become cash ISAs. You may have invested in mini stocks and shares ISAs and the stocks and shares component of a maxi ISA which will have automatically become stocks and shares ISAs. All Personal Equity Plans (PEPs) will have automatically become stocks and shares ISAs.

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 gilts' 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.

Firstly, there are the income payments which the investment produces and, secondly, its capital growth. For example, with an equity investment, the shares you own will produce both income from the dividends and - hopefully - capital growth from a rising share price. The Government taxes both elements of this gain through income tax and then CGT.

For the 2010/2011 tax year CGT is charged at a flat rate of 18% for individuals where the total taxable gains and income after taking into account all allowable deductions including losses, personal allowances and the CGT annual exemption of £10,100 are less than the upper limit of the income tax basic rate band of £37,400. For those with gains or parts of gains above this limit 28% will be charged in capital gains tax.

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

Please note: Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

Tax saving tips

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

Your pension – Max up your pension contributions before the end of the tax year in order to gain generous tax relief and then benefit from the tax efficient treatment of pension funds.

An ISA’s nicer – Individual Savings Accounts are great for tax breaks if you’re saving or investing.

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

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

Check your code – Make sure you have the right tax code or you could be paying tax at the wrong rate.

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

Don’t get stamped on – You can save literally thousands in stamp duty by buying in a disadvantaged are or by negotiating the purchase price below stamp duty thresholds.

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

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

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

Don’t pay income tax if you don’t have to – if you’re under 65 and earning less than £6,475 in the tax year 2010/2011, click here to download the R85 form and claim back your overpaid income tax.

Why don’t you check out our ‘Tax Waste Calculator’ to find out how much tax you could currently be wasting?

Tax waste

UK adults will waste almost £10 billion in unnecessary tax in 2009, according to our latest TaxAction report.

But, tax doesn’t have to be taxing – Here are 10 basic ways to claw back some of the waste:

IF YOU ARE SINGLE AND HAVE ASSETS OVER £325,000 (2010/2011) OR MARRIED/CIVIL PARTNERSHIP WITH ASSETS OVER £650,000 (2010/2011): Plan your inheritance - an extra £2.24 billion could go to chosen heirs by planning properly to avoid IHT liabilities. IHT is often lost through not writing life assurance policies in trust, not thinking about inheritance tax allowances and, worst of all, by not making a will at all.
IF YOU SAVE: Use up your annual ISA allowance - £144 million in tax could be avoided by sheltering investments in ISAs, or moving savings from an ordinary deposit or savings account to an ISA. Also consider a Friendly Society savings account or products from National Savings & Investments as tax-efficient savings options.
IF YOU ARE ELIGIBLE: Claim your tax credits - £4.24 billion of ‘free money’ is up for grabs from HMRC and the DWP, in the form of Pension Credits, Child Tax Credits and Working Family Tax credits.
IF YOU FILL IN A TAX RETURN: Sort out your self-assessment - £503 million waste could be wiped out by all forms arriving present and correct by the 31st January deadline. Self-assessment forms received after the deadline incur penalties of £100; further penalties and errors make up the balance of tax wasted in this way.
ALL TAXPAYERS: Maximise your personal tax allowances - £349 million goes begging each year, £310 million through non-taxpayers failing to claim tax back on banks and building society savings accounts, and a further £39 million by taxpayers not transferring savings accounts to non-taxpaying spouses, if appropriate, so that the tax liability on the savings is lower, or none.
IF YOU SAVE: Top up your pension pot - £720 million could be spared by optimising contributions to personal or company pension schemes, or making Additional Voluntary Contributions.
IF YOUR EMPLOYER OFFERS AN EMPLOYEE SHARE PLAN: Take advantage of it - £171 million is up for grabs for the estimated 570,000 staff currently in Profit Related Pay schemes.
IF YOU HAVE CAPITAL GAINS: Use your allowance efficiently, perhaps by transferring assets between spouses to make the most of both of your CGT allowances - £309 million could be saved in this way.
IF YOU GIVE TO CHARITY: £1.14 billion more could go to good causes by using tax-efficient means of charitable giving, i.e. using a deed of covenant, Gift Aid or payroll giving.
IF YOUR CHILD OR GRANDCHILD IS ELIGIBLE FOR A CHILD TRUST FUND: Avoid waste by using up the tax free saving potential - £63 million in tax could be saved in their first year of existence.

What could you buy with £10 billion?

Every female in the UK could own a Stella McCartney dress (Stella McCartney dress: £3,000)
50 of Roman Abramovich’s yachts (Yacht: £200 million)
64,993 homes in UK (Average cost May 2010 LandRegistry.gov.uk: £165,314)
An iPhone for every person in the UK (iPhone 8GB: £99)
According to the most recent estimations – you could pay for the entire London 2012 Olympic Games

And finally...

£10 billion would make you the second richest person in the UK!

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, level of incremental qualifications, gender and payment options) so you can be sure you’ll find an IFA that meets your precise requirements.

If you are looking for advice on personal finances visit our website at www.unbiased.co.uk

For further information on the subject, please contact your IFA. To find an IFA in your local area, please use our ‘find an IFA’ search which enables you to search for an IFA local to you based on your postcode and a range of other criteria such as area of advice, qualifications and payment options.

This guide was created by IFA Promotion Ltd (unbiased.co.uk) and has been approved by a person authorised and regulated by the Financial Services Authority. The value of investments and the income from them can go down as well as up and you may not get back your original investment. This could also happen as a result of changes in the rate of currency exchange, particularly where overseas securities are held or where investments are converted from one currency to another. Past performance is not necessarily a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trade-marks of IFA Promotion Limited.

October 2010