If you are looking to avoid paying tax you are on increasingly dangerous ground. As the Financial Times points out, the spotlight is falling on “investment schemes designed to minimise tax” and many are set to “lose millions” as a result.
But if you are worried, you probably shouldn’t be. Why? Because, as Ian Cowie says in The Sunday Times, from this week any ordinary couple with two children can between them put an “eye-catching £1m” in tax shelters over a mere eight years.
They can put £15,000 each into a Nisa (new individual savings account) and never pay another penny of income or capital-gains tax on the returns. They can put £40,000 into a pension – which comes free of income tax and then rolls up tax-free until retirement.
The children also have pension allowances of another £3,600 each and junior Isas of £4,000. Add it up, and assume allowances don’t change, and you can see how it isn’t that hard to put away a pretty vast amount of money as a family. There is, says Cowie, “huge scope” to keep more of what you earn without going anywhere near a “dodgy tax haven”.
There is, of course, a catch – Isas and pensions are “use it or lose it” allowances. You can roll your pension allowance forward for three years, butthis is ripe for restriction and your Isa allowance expires in early April every year.
That’s why – with markets looking expensive – it is such good news that you can now keep your entire Isa allowance in cash and get tax-free interest on that cash until you are ready to invest it.
Not many of us are going to need much more in the way of tax havens over a working life. But for those who do (lucky you…), there are a few other options.
At the low-risk end there are premium bonds. You can put another £40,000 into these and all your returns will come tax free. The downside is that those returns are unlikely to be particularly good.
No interest is paid. Instead, each £1 bond is entered into a prize draw to win one of 1.8 million prizes every month. Win the top prize (£1m) and it will all feel very worthwhile. Win £25 a year on a full holding and it won’t.
Up at the higher-risk end there are Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS). You might feel that once you have fully used up your Isa and pension allowances,you are able to stomach the risk of investing in the smaller companies this involves.
But you might not fancy the charges much. As Brewin Dolphin’s Rob Burgeman tells the FT: “the only common feature among EIS and VCTs is their eye-watering charges”. Best stick with the funds we suggest on page 30 for your Nisa.