From 6 April 2010 individuals subject to UK tax and earning incomes over £150,000 will be subject to a 50% income tax rate. These high earners, and anyone else who considers investing their cash in a savers account, have a range of tax-free products available to them. These products will help mitigate their overall tax bill.
Saving Tax with Individual Savings Accounts (ISAs)
From 6 April 2010 everyone is entitled to put £10,200 into one of these savers accounts, and the interest earned is tax-free. There are two types of ISA: a cash ISA and a stocks and shares ISA. Investors can save in two separate ISAs in any one tax year: one cash ISA and one stocks and shares ISA. Money can generally be taken out at any time although some of these savers accounts have a notice period.
Tax-free Investments with National Savings & Investments
Investing in one of these government-owned products is a good example of a tax efficient investment strategy. Index-linked certificates allow individuals to invest up to £15,000, and interest is received free of income tax. According to the statement on the National Savings & Investments website, returns on these certificates are guaranteed to beat inflation when held for at least a year. There is a choice of investment terms and they can be cashed in early, but no index-linking or interest is paid if they are cashed in within the first year.
With premium bonds, the investors can buy up to £30,000 worth. There is no interest but each bond enters a monthly, tax-free prize draw. The prizes range from £25 to a £1 million jackpot and the bonds can be cashed in at any time.
Saving on Tax by Investing in Spouse’s Name
A couple (married or in a civil partnership) can benefit from reduced tax on their savings income if they hold the investments in the name of the spouse who falls into a lower tax bracket.
All UK tax payers currently get a £10,100 annual capital-gains tax allowance, which is the amount they can make tax-free when they buy or sell investments. If they are likely to exceed this amount, they may want to consider transferring some of their assets to their spouses before selling them and thus using up their spouse’s allowance as well as their own.
Tax Relief on Pensions
For basic-rate tax payers, pension contributions currently attract a 20% tax relief. For higher-rate tax payers, this relief is as much as 40%. However, the current government rules stipulate that only up to £20,000 of an annual contribution from those earning £130,000 plus will qualify for higher-rate tax relief.
For further tax saving strategies, please check out article Saving on Tax and Tax Efficient Investing Post 6 April 2010.
References:
Jackson, Ruth. “How to Tackle the New Tax Regime.” MoneyWeek, 5 March 2010.
nsandi.com
