Tax efficiency
To encourage savings and investments the government provides tax breaks for certain types of investments but limits what you can put in. The four main types are
Individual Savings Accounts
Pensions
Venture Capital Trusts and
Enterprise Investment Schemes
Individual Savings Accounts (ISAs)
ISAs are available to everyone over the age of 18 (16 for cash ISAs) and ordinarily resident in the UK. There is no income tax or capital gains tax to declare on your annual tax return in respect of any income or profits that you make. Due to these tax advantages investment is limited to an allowance of £7,200 per annum. This allowance will increase to £10,200 for the over 50’s in October 2009 and for others in April 2010. Up to half of the allowance can be saved in cash with one ISA provider. The remainder of the ISA allowance can be invested in stocks and shares with either the same or a difference provider.
Pensions
You can now put in up to 100% of your earnings each year and attract tax relief, up to a lifetime limit. Of course, few people can afford to put this much aside but, as with any regular saving, it is a good discipline to plan for your future so that you can maintain your lifestyle in retirement. Your financial adviser can help you find the best type of pension plan to suit your income, tax situation and ambitions.
Venture Capital Trust (VCT)
A VCT is a company, broadly similar to an investment trust (see types of investment), which subscribes for shares in, or lends money to, small companies. Under an approved VCT scheme, investors enjoy income and capital gains tax relief. Individuals invest by holding shares in a VCT. The VCT invests in a spread of small unquoted companies, enabling investors to spread their risk, just as they do by holding shares in an ordinary investment trust company.
Enterprise Investment Scheme (EIS)
These are a form of Venture Capital Trust. The EIS is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. You can also invest through an EIS Fund, which will invest on your behalf in a number of qualifying companies. As with a VCT you are still the owner of the shares.
