In case you not yet noticed – and we really wouldn’t blame you if you haven’t – but next week marks the end of the current tax year. On 6 April a brand new year starts. Ta dah!
This means you have just under a week to use up any tax allowances you have, as they run from 6 April 2011 to 5 April 2012. If you don’t use it by midnight on 5 April2012 you lose it, basically.
What does this mean for me?
If you have a personal pension, you can put up to £50,000 a year into that pension in any given tax year. That’s a lot, but this amount is going to change following last week’s budget. So if you’ve won the lottery or have a large inheritance kicking around then you may want to consider it.
For most of us the easiest and accessible way to invest tax free is via an individual savings account.
These comes in two versions – one that invests in cash and one that invests in the stockmarket. With a cash ISAs basically you are lending your money to the bank, whereas with a stock market ISA the bank is investing it in companies (via shares) on your behalf.
You can invest up to £5,340 cash ISA or £10,680, in a stockmarket ISA.
How does the tax free bit work?
With an ISA you don’t pay tax on the interest you earn and you don’t pay capital gains tax on any money you take out from the ISA.
With a pension you get the income tax you pay on the money you contributed, but you do pay some tax on your investment and you will pay tax when your pension pays out – assuming you get paid enough from your pension to earn income tax.
So where do I get one?
Here’s where you need to do your research. If you are considering a stockmarket ISA you may be best off taking independent financial advice, especially if you’ve never bought shares before.
Cash ISAs pay a fixed rate of interest, you can compare the best rates on an independent comparison site like Moneyfacts. There are other comparison sites out there but financial journalists (such as our editor Samantha) tend to use this one as guide.
If you are really brave you can choose to invest your ISA directly into shares.
Investing directly, where you choose what shares to buy, allows you to choose individual companies you think will make a profit best of all because you are not paying a charge for someone else to do it, you have the potential to make more money.
You can invest directly in shares through a stockbroker. The cheapest way to do this is online – you can find one via the Association of Private Client Investment Managers and Stockbrokers website find a broker search facility.
What else can I do?
Tom McPhail, is head of pensions research at Bristol-based advisers Hargreaves Lansdown (you’ve probably seen him on TV).
He recommends having a stockmarket for longer-term savings (such as a pension) and keeping your cash ISA as a rain-day fund.
And if you don’t earn a salary but you have a partner who does, they can put £3,600 a year into a pension on your behalf. In fact you can even this allowance to start a pension for your child.
If you have children don’t forget your child’s junior ISA allowance So if you want to put money aside for your children or grandchildren, a Junior ISA is one of the simplest and most tax-efficient ways to do this – up to £3,600. If you have a child trust fund you can use this allowance to top up that
In fact Tom reckons a couple with 3 children could use a combination of Sipp and ISA allowances to save up to £6,480 a year for each child and between them the household could save at least £46,560 a year tax free – more if their earnings justify higher pension contributions
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