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Tuesday, 21 October 2014

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How to grab a tax break

In the current climate of cuts and tax rises it is arguably more important than ever to make the most of whatever tax breaks are available.

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Cost effective: You may well feel more comfortable setting up a business account with a bank you already know personally, but they may not offer the best deal

 

In recent years successive governments have tried to stimulate investment in UK companies by offering tax advantaged savings and investments. With the historically low interest rates available today it is debatable whether there is any great incentive to save at all. In fact, some may argue that the Government would prefer us not to save but to spend in order to stimulate the economy.

The run-up to the end of the financial year has become known as ‘ISA season’, as savers and investors scramble to make use of their annual ISA allowance. This may be a radical suggestion, but why not make your ISA contribution at the start of the financial year? Avoid the last-minute rush and sit back and relax for the rest of the year safe in the knowledge that your money is working for you sheltered from the grasp of the taxman.

The Individual Savings Account, to give the ISA its full title, has been around since 1999 and most investors are familiar with the rules. However, this financial year sees some changes in contribution limits.

As from April 6 the annual amount that can be saved in an ISA will rise in line with the Retail Price Index (RPI). The distinction between the two types of ISA remains, with the new limit for a cash ISA being £5,340 and a stocks and shares ISA being twice that at £10,680. It is still possible to split the investment equally between the two types, i.e. £5,430 each.

Should you invest in a cash ISA or a stocks and shares ISA? The decision as to which is more suitable depends on a number of factors, such as how much access to the capital you want or need, how long you can tie up the capital for, whether you want income or capital growth and the degree of investment risk you wish to expose your capital to.

Non-tax payers should not automatically assume that an ISA is the best home for their money. Some bank accounts offer a better rate than ISA accounts so check the rates on offer carefully.

It’s all well and good searching out the best rate or investment fund for this year’s ISA, but don’t neglect those investments done in years gone by. A lot of banks and building societies will give an introductory bonus to attract new money, but when the bonus is taken away the interest rate may not be very competitive, so shop around and take advantage of the opportunity to transfer to a new provider if you find a better offer.

If your appetite for risk allows, consideration should be given to transferring from cash to a stocks and shares ISA, but remember you can’t transfer back again.

Check on your stocks and shares ISA to make sure that it is performing in line with your objectives. If not, consider making changes, but check out any charges or penalties for doing so.

If that all sounds too much like hard work, ask your independent financial adviser for some help.

For more information or independent financial planning advice email moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.

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