How to pay less tax and get away with it
Paying less tax is actually very easy.
A survey last year found that in the UK we give £1.4 billion to the taxman every year that we could be keeping for ourselves. And to save this incredible sum, all we have to do is take advantage of ISAs.
This may seem to drop into the 'too difficult' bracket, but once you get your head around them, you'll be shocked at how simple they are. An ISA is just a wrapper. You put this wrapper around things you already understand and may well already have, and it makes the thing inside the wrapper tax-efficient.
Cash ISAWith a cash ISA - you're wrapping the ISA around a savings account, which removes the tax from the account. Normally you pay your highest marginal rate on interest on your savings - which would be 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for addition rate taxpayers. Within the ISA wrapper all interest is tax-free.
Like with savings accounts, cash ISAs come in a number of different guises. You can get instant access accounts, ones with notice periods, and ones with fixed interest. So you pick the one that suits you, and that's all the hard work done.
In return for not paying tax you do have to follow a couple of rules. You can only save up to your annual limit each year - which runs from April-April, and is £5,760 this year, and £5,940 for the 2014/15 tax year. In addition, if you withdraw anything from your savings you can't top it up again, the sum you have withdrawn disappears from your annual allowance.
If everyone in the UK simply switched their annual allowance from a savings account to a cash ISA, we would collectively save an estimated £1.3 billion.
Stocks and shares ISAInside these ISAs are investments. These come in a few guises, but essentially are longer-term investments that can fluctuate in value over time.
For the experts, this can mean putting their ISA allowance into a platform with a broker, which allows them to buy and sell the shares of specific companies. This involves a relatively high degree of risk, so tends to suit those who are comfortable with risk and already have a spread of investments.
For less expert investors, this often means buying into a fund. In these you give your money to a fund manager, who will invest in the companies they think will perform best. There are lots of types of funds - such as those which invest in big blue chip UK firms, or those who invest in Chinese companies, or those who invest in small businesses around the world. On the plus side this means that you are sure to find one that's exactly what you're looking for.
The small downside is that picking one requires a bit of work. However, once you have narrowed down how much risk you want to take, the type of fund that matches that risk, and the fund manager that is recommended in that area, then you can leave things up to them (although it's worth keeping an eye on how they perform).
Most people buy funds through a platform with a broker, because the initial fees on these funds are discounted. It also makes it easier if you want to split your investment between a number of funds, or change your investments in the future.
TaxThis is not only an opportunity to make sure you develop a strong range of investments, collectively if we shifted the money we already had invested in stocks and shares into ISAs we could save £62 million in tax every year.
These ISAs aren't entirely tax-free. However, you avoid paying capital gains tax. If you invest in shares outside an ISA, and make over the annual allowance (£10,900 this year), you have to pay tax (at 18% for basic rate taxpayers and 28% for higher rate taxpayers). Inside an ISA you are free of any capital gains tax.
If your ISA holds bonds then you don't have to pay any tax on interest earned on them, and there's a 10% tax on dividends on shares. This is the case for basic rate taxpayers even outside an ISA. However, higher-rate taxpayers pay 22.5% and additional-rate taxpayers pay 32.5%, so they stand to save substantial sums.
To get these tax advantages you have to stick to the rules. The big one is that you have an annual allowance that you cannot go over. Each year you have an allowance. In the tax year from April 2013- April 2014 it was £11,520 and in the new tax year starting in April 2014 it will be £11,880. However, that's split between your cash ISA and your stocks and shares ISA. In the 2014/15 tax year, if you have invested the full £5,940 in cash, then your stocks and shares investment are limited to £5,940. However, if you invest just £1,000 in your cash ISA, you have £10,880 left over for stocks and shares, so you can find the balance that suits you.
The other rule is that if you take the money out, you can't invest it elsewhere, so if you want to switch investments make sure you transfer the money rather than cashing it in and trying to invest again.
Once you've got to grips with the rules, you can feel the sense of smugness that only comes with the knowledge that not only are you saving and investing for the future - but you're doing it beyond the reaches of the taxman too.