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Making a tax molehill

Created:
27 March 2008

Investors are often told that they shouldn't let the tax tail wag the investment dog. In other words, don't invest in a panic at the last minute just to ensure you use a tax relief.

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But in volatile markets, you need to grab at certainties such as tax breaks that can give your portfolio a boost. If you can pay less tax on your investments, this is a helpful extra cushion to protect your assets from market storms.

In total, UK adults will waste an astounding £9.3bn in unnecessary tax in 2008. The TaxAction report from Unbiased.co.uk , which promotes the benefits of independent financial advice, shows that the amount wasted in tax payments will increase by almost £1.4bn compared to 2007. The figure is the highest ever since Unbiased.co.uk’s campaign, now in its 16th year, began.

Alarmingly, more than eight in 10 Brits admit to doing nothing to reduce their overall tax burden. David Elms, chief executive of Unbiased.co.uk, says: "With more and more people feeling the pinch in the current financial climate it is surprising just how much we are willing to throw away in wasted tax payments. We estimate that each UK tax payer will waste an average of over £290 in tax payments this year."

With a few days remaining to the end of the 2007-08 tax year, you still have time to stash investments away from the tax man using 'tax wrappers' into which you can make investments of your choice.

Individual savings accounts (Isas) - annual allowance £7,000 - allow the investments held inside to grow free of tax.

The end of the tax year is an arbitrary deadline that providers use to push Isa investment funds. However, if you're worried about the short-term prospects for the equity markets, you don't have to invest your allowance straightaway; you can either leave it in cash within the account or invest in an Isa eligible cash fund that will act as a safe haven for the short term. Or you could put £3,000 in a cash Isa - after April you can transfer cash Isas to stocks and shares accounts, so you can make the move when markets seem calmer.

Pensions - annual allowance £225,000 - give up to 40 per cent upfront tax relief on your investment, subject to conditions and within certain limits. Remember that you can put investment funds and direct equities into a self-select Isa or a self-invested personal pension.

For investors prepared to take extra risks with their money, Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) provide the possibility of further tax breaks.

MORE ON AVOIDING TAX...

See our free investment guide to taxation for more.

Moira O'Neill is Investors Chronicle's personal finance editor. Contact her at moira.o'neill@ft.com with your questions about managing money or investing in funds.

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