Get an ISA habit
The simplest way to limit the amount of tax liability on your investments is to open an ISA.
ISAs are subject to annual subscription limits. For the tax year ending 5 April 2014 the maximum subscription is £11,520. Up to £5,760 of this overall limit can be saved in a Cash ISA with one provider. The remainder of the £11,520 can be invested in a Stocks and Shares ISA with either the same or another provider. Alternatively the full £11,520 can be invested in a Stocks and Shares ISA with one provider.
You can subscribe up to these amounts any time during the tax year. Allowances cannot be carried forward to the following tax year, so make sure you've subscribed the full amount by the tax year end.
Pay into a pension
Pension plans are simply investments designed to help you save for an income in your retirement. Basic-rate taxpayers benefit from 20% tax relief on pension contributions which means that, for every £80 you pay in, you actually end up with £100 in your pension pot. Taxpayers paying more than the basic rate tax receive income tax relief at their highest marginal rate. So if you're a higher or additional rate taxpayer, you can receive relief at 40% or 45% for this tax year. In this tax year 2013/14 you can save up to £50,000 (annual allowance) in your pension without incurring a tax charge, although you may be able to carry forward any annual allowance that you have not used from the previous three tax years to the current tax year. For more information please visit the HMRC site.
You can usually take benefits any time after the age of 55 and will usually be able to take up to 25% of the money as a tax-free lump sum. The remainder will be used to obtain an annuity or some form of drawdown pension, the income from which will be taxed as earned income.
If you choose a self-invested personal pension, you can do much of the management yourself - and you could even have the pension fund invest in your own business premises.
Invest in Onshore investment bonds
An Onshore investment bond is a lump sum that you invest with an insurance company. They are a good way of allowing you to invest in a mixture of investment funds managed by professional investment managers and offer a potentially tax-efficient way of holding a range of investment funds in one place.
Onshore investment bonds can be useful if you've received a large sum of money, such as an inheritance or the proceeds of selling a business. Once you've invested your money into the bond, you're allowed to withdraw up to 5% of your original investment per policy year without an immediate charge to income tax. This is capped at 100% of your investment.
For example, anyone who puts in £150,000 can withdraw £7,500 a year, for 20 years, without an immediate tax charge. The return on the life fund in which your investment is held, is subject to an underlying corporation tax charge, which is deemed to represent the income tax charge at the basic rate.
Any withdrawal exceeding the 5% allowance could be subject to an immediate higher-rate tax charge on the excess. There may also be a higher-rate tax charge when the bond comes to an end.
The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested. For some investments this can also happen as a result of exchange rate fluctuations as shares and funds may have an exposure to overseas markets. You should aim to invest for at least five years.
Please be aware that the value of tax reliefs will depend on individual circumstances and tax rules can change. Pensions are not normally accessible until retirement benefits are taken.
