Top tips for tax efficient investing

As the end of this tax year fast approaches, Barclays Stockbrokers shares its top tips for investors looking to maximise the tax efficiency of their savings and investments.

Catherine Penney, Vice President, Barclays Stockbrokers, comments: "Time is running out for investors wanting to use this year's tax free allowances, and there is no better time to review savings and investments to ensure returns are being maximised.
 
"With an allowance of £11,280 this tax year, the real strength of ISAs is evident where they are used year on year to build a portfolio protected from income tax and capital gains tax.  Over ten years an investor can contribute more than £100,000 to a stocks and shares ISA portfolio. While in periods of low growth investors may question the need to use ISA allowances to protect growth from tax, looking at the longer term benefit the importance becomes obvious. By gradually building a tax efficient portfolio investors can supplement their pensions by generating tax free income from ISA investments on reaching retirement.
 
"Depending on an individual's circumstances, pensions can offer more immediate tax benefits. Overall, investors should strike the balance between ISA and pension savings that suits them - bearing in mind the important tax benefits on offer and the need to maintain flexibility in case access is needed to savings before reaching age 55.
 
"For additional rate taxpayers there is a further window of opportunity. The top rate of tax will fall to 45% from 6th April meaning the tax relief available on pension contributions will also fall to that level. Someone who has not contributed the full £50,000 for this year and the last 3 tax years, can use carry forward to top up to their full allowance. Carry forward allows someone to make up for any allowances they haven't used for the past 3 years. This means that it is possible to receive 50% tax relief on up to £200,000 this year, provided that additional rate tax has been paid/ would otherwise have been paid on this amount. Therefore assuming £100,000 of contributions and that someone has sufficient earnings subject to additional rate tax, they can secure an extra £5,000 in tax relief by acting this tax year rather than after 6th April 2013."
 
Top tips for tax efficient investing are:

1. Take advantage of maximum allowances
 
This year investors can put up to £5,640 into a cash ISA and either the full £11,280, or whatever is left over, into a stocks and shares ISA. The allowance will increase to £11,520 in the new tax year (2013/2014) - using an ISA to invest can help to protect significant sums from tax. Savings and returns in ISAs are free from income and capital gains taxes (CGT).
 
2. Use money you already have
 
Investors don't have to find new money to fund an ISA; they can transfer either cash or any qualifying assets they have in a trading account into their Investment ISA, or use share certificates they already hold. This is often called Bed & ISA.
 
3. Think of pensions to preserve your child allowance

This is the first year that households where one party earns £50,000 or more will lose some or all of their child allowance. Those earning just over £50,000 may like to consider whether they wish to make additional pension contributions so that their income falls back below this level to preserve this valuable allowance.
 
4. If you are a couple use both of your allowances
 
Investors should be aware that if their partner is charged tax at a different rate, it makes sense for the person with the lower income to hold the investments. That way, investment returns are taxed at a lower rate of income tax and CGT. Careful planning may be required.

5. Don't let changing rules put you off pensions
 
UK residents and those with UK earnings subject to income tax currently have an annual allowance of £50,000 or 100% of their income, whichever is lower, for pension contributions. Tax relief of up to 50% can be received on these contributions and the assets are protected from income and capital gains tax within the pension. The annual allowance is set to drop from £50,000 to £40,000, but this change doesn't come into play until 6th April 2014. Therefore any additional rate taxpayers with sufficient income can receive up to 50% tax relief on £50,000 in this tax year (more if carry forward is available), and 45% tax relief on the same amount next year.
 
6. Make the most of ‘carry forward'
 
All savers should also consider whether they have unused relief for carry forward from earlier years which they could offset against 2012/13 income. While this is particularly for additional rate taxpayers who can still receive 50% tax relief up to 5th April 2013, those who pay tax at the lower rates can also reduce their tax bills by using their allowances.
 
7. Review retirement savings on a regular basis
 
It's also important people review their retirement savings in their entirety (if they have more than one pension pot for example) to ensure they are getting the best possible returns on their investments across the board.
 
8. Transfer investments into one place
 
Ensuring that your existing ISA and pension investments are in the right place and performing well is equally important to using your allowances for this year. Transferring investments onto one platform means investors have access to the best performing funds as well as the tools to easily monitor performance across all assets and manage a portfolio effectively. Although, investors should ensure that they are not giving up valuable benefits though, such as those from final salary pension schemes.
 
9. Review your asset allocation decisions
 
In tough economic times, it's even more important investors review their existing investments - to make sure they are working as hard as possible. Having all your investments in one place makes this easier, because it's not just the performance of individual investments that needs monitoring, it's also asset allocation decisions - i.e. equities versus bonds.
 
10. Contribute to more than one pension in a year
 
In addition to  any company pension schemes you may belong to, you can put the rest of your allowance (annual allowance less contributions made by you, or on your behalf) into a SIPP (self-invested personal pension), giving you greater control over your retirement plans.