The end is nigh – now for a new beginning

The 2006/2007 tax year is now over – once the clock hit midnight on Thursday April 5th that was that for another year as far as the taxman was concerned.

However while he was clocking off, time also ran out for savers hoping to beat the taxman.

The big way to avoid tax for savers and investors is the ISA allowance and the bad news is that if you missed the April 5 deadline you missed out.

The good news is that when one door closes another door opens. And the end of one tax year means the start of a new one.

Don’t get fooled again

ISAs sound complicated but they’re pretty simple really. The initials stand for Individual Savings Account which is pretty self-explanatory

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 you should take advantage.

You’re allowed to invest £3,000 in a cash ISA and another £4,000 in a shares ISA. Instead of cash and shares ISAs you can invest all £7,000 in a shares ISA.

As the name suggests, though, choosing a shares ISA will involve taking a risk. You need to be prepared for ups and downs in share prices.

Cashing in

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.

Cash isn’t all there is

The run up to the end of the tax year is often referred to as the ISA season, when investors rush to take advantage of the tax breaks available to them if they use ISAs.

It is also a time of the year when product providers offer discounts on their charges to entice savers into their particular investment funds. You don’t have to focus on the tax year as you can invest all year round.

Canny investors can cash in to get a saving on their investment fund ISAs, but there are also ways of getting other discounts all-year-round. If you don’t know about these cut-price deals then let help you.

Currently you can invest up to £4,000 a year in an investment fund mini ISA or £7,000 in a Maxi ISA. This will rise to £7,200 from April 2008.

Underlying these ISAs is a choice of three kinds of investment funds – unit trusts, investment trusts and open-ended investment companies or Oeics. All three pool the assets of a number of investors and invest in a broad range of stocks and/or bonds. This means investors can avoid putting all their eggs in one basket.

Mind the charges

All funds usually come with set-up and annual management charges. Unit trusts and Oeics normally have an initial charge of five to six per cent. This pays for any commission due to a broker and the administration cost of setting up the investment. Investment trusts have initial charges too, whether in the form of stockbroker fees or charges made by the trust’s management company.

The annual management charge or AMC on unit trusts and Oeics is usually around 1.5%, about a third of which goes to the broker and the rest to the fund manager. Investment trusts usually have lower AMCs.

You can get discounts on initial or management charges and sometimes even both.

But remember discounts aren’t everything

Finding a discount is great, but you should not just invest with the cheapest funds. A good fund with no discounts can still give you a better return than a cheap fund with poor performance.

Make sure you find the right fund for you before taking advantage of any discounts. If you need to see an adviser be warned that you may well lose some or all of your discount to pay for the advice.

Alternatively, take a look at a panel of best performing funds by clicking through the Investment button on, where 1,000 funds are listed with the option to speak to an adviser.

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