Roman Abramovich does it as do the mega-rich Hinduja brothers and Britain’s richest man Lakshmi Mittal. They’re all billionaires who manage to beat the taxman through using legal tax loopholes. Accountants Grant Thornton reckon the UK’s 54 billionaires pay income tax of around £14.7 million on wealth of £126 billion.
Billionaires have the advisers to help them do it and can rely on so-called non-domiciled status to allow them to place their money in offshore tax havens and only pay tax on the cash they bring into Britain. It’s all entirely above board and, according to the Government, helps boost the UK economy.
Millions of us might think that it would be nice to be able to beat the taxman as efficiently as the billionaires. Then again we don’t have the money to need to beat the taxman as efficiently so perhaps it’s best not to worry too much.
However there are simple things we can all do to avoid paying too much tax. And the cash ISA is something everyone with any savings should have. MoneyExpert.com explains the ins and outs of ISA investing…
Take an interest in your savings
ISAs sound complicated but they’re pretty simple really. The initials stand for Individual Savings Account and they mean that every adult can save £3,000 a year tax-free. The Government taxes interest on ordinary savings accounts but not interest in ISAs.
Cash ISAs are just ordinary savings accounts with the only difference being that you don’t pay tax on the interest you earn. If you are a basic-rate taxpayer you’d normally pay 20 per cent tax on your interest and if you’re a higher-rate taxpayer you’d lose 40 per cent of your interest.
That means if you put £3,000 in an ISA at the start of the tax year and it pays you five per cent interest you’ll earn £150 interest in the year.
The same £3,000 in an ordinary savings account paying five per cent interest would earn £120 interest in the year if you are a basic-rate taxpayer and £90 if you are a higher-rate taxpayer.
Take an interest in the rules
The tax year runs from April to April so if you are going to make the most of your ISA allowance you need to invest £3,000 before April 5th this year.
In theory – and if you’ve got the spare cash – you could put £3,000 in a cash ISA on April 5th and £3,000 in on April 6th and it would all be tax-free. You are though only allowed to put in £3,000 in a year.
And once you’ve invested £3,000 in the tax year that is that. So if you think you might need the cash at a later stage it might make sense to wait.
You don’t have to pay it all in a lump sum. You can make regular contributions as long as at the end of the tax year it doesn’t go above the magic £3,000 figure.
Take an interest in your account
Not all cash ISAs are the same. Generally you should be looking for an interest rate of at least five per cent.
There are around 270 accounts on the market from more than 90 providers and inevitably the rates vary. The worst-payers are around 3.75 per cent while the best go above six per cent.
It makes sense to keep an eye on the rate as it will make a big difference to how much you earn in interest.
You should also look out for terms and conditions. Some might not allow you to withdraw cash at all during the year while others will allow you to operate the ISA as a normal instant access account. Others might insist you have to give notice when you want cash out.
Cash isn’t all there is
Everyone has a maximum ISA allowance every year of up to £7,000. Of course you have to have the £7,000 first but if you have spare cash on top of the £3,000 for the cash ISA you should look at shares ISAs.
They though will involve taking a risk. The stock market recently has taken a beating so you need to be prepared for ups and downs in share prices.
That though doesn’t apply to cash ISAs. Your cash is safe and you can be guaranteed to get your cash back with a bit of interest. And you’ll also beat the taxman.