New financial and civil penalties for bankers and accountants who aid and abet tax evasion and aggressive tax avoidance are expected to be included in the budget next month in the wake of the HSBC tax avoidance scandal.
Aggressive tax avoidance schemes typically try to exploit legal loopholes but there are many perfectly legitimate mainstream ways to invest tax efficiently using statutory allowances.
Individual savings accounts and pensions are popular ways to avoid taxes on your investments. But use of offshore bonds and the capital gains tax allowance can often be overlooked.
Plus, the new pensions legislation that will become effective on 6 April 2015 will allow more flexible access to pension savings for those aged 55 or above.
David Smith, financial planning director at Tilney Bestinvest, says: "The new pension legislation, coupled with existing tax laws and allowances, will enable those with sufficiently large investments to manage their income in such a way as to reduce, and possibly completely extinguish their potential exposure to income tax."
He demonstrates in the case study below how it is possible to earn £40,000 tax-free by making use of new and existing tax allowances.
Case study
Male aged 60 who receives no taxable income. His target income is £40,000 net on a portfolio worth £858,000 shown in the table below. This is equivalent to a 4.6 per cent yield.
| Investment | Value |
| Personal pension | £400,000 |
| Offshore bond invested via 100 segments | £150,000 |
| Portfolio of funds and shares | £108,000 |
| Individual savings account (Isa) portfolio | £200,000 |
How the case study can achieve £40,000 tax free income
| Action | Tax free income |
| Withdraw gross income from pension up to personal allowance for 2015/16 tax year | £10,500 |
| Additional tax-free cash from pension 25% | £3,500 |
| Surrender 10 segments from offshore bond (includes £5k gain) | £15,000 |
| Withdraw £8k capital gain from fund portfolio | £8,000 |
| Withdraw remaining income requirement from Isa | £3,000 |
| Total tax free income | £40,000 |
Mr Smith says: "Utilising HMRC tax allowances should not be overlooked. If this same person was sitting with £800,000 in a bank account they could be looking at an income of only £14,800 per annum (net) which would have no prospect of capital appreciation."
