Time is running out to claim your tax-free money

Gordon Brown has done his bit with the Budget last week and held out on the prospect of cuts in the basic rate of tax to 20 per cent from 22 per cent in April 2008.

However you don’t have to wait a year to start cutting your tax bill. You can make a start now – but you’d better get a move on.

April 5th is the date to put in your diary and the initials to remember are ISA.

Use it or lost it

ISA stands for Individual Savings Account and it means each of us can save up to £7,000 a year tax-free. It might sound complicated but in reality it is pretty simple – you can save or invest up to £7,000 every tax year and the deadline for this year is Thursday April 5th.

If you’ve not invested anything in an ISA by April 5th then you lose the opportunity to beat the taxman until next tax year. So what are you waiting for? Compare cash ISAs or compare savings ISAs now!

Know your limits

You can invest all the £7,000 in a shares ISA – it’s known in the jargon as a maxi-ISA. If you already invest in unit trusts then it’s just a matter of putting more cash into the ISA you already have.

You don’t have to put it all in shares though. You can opt to put up to £3,000 in a cash ISA. They’re the same as a bank or building society savings account with the crucial difference that any interest you make is tax-free.

That’s interesting

If your savings are not in a cash ISA then you pay tax – 20 per cent if you are a basic-rate taxpayer or 40 per cent if you are a higher-rate taxpayer.

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. So you’d be giving Gordon £30 if you are a basic-rate taxpayer and £60 if you are a higher-rate taxpayer.

Sharing it out

For shares ISAs the tax benefits are not as obvious. You won’t pay capital gains tax on the rise in the value of your shares. However annual capital gains tax allowances are increasing to £9,200 so it shouldn’t worry you too much.

That means any share investment has to rise in value by more than £9,200 by the time it comes to sell it and cash it in so it won’t be a massive problem. You can hope though!

Don’t trust to hope

Remember the April 5th deadline and take full advantage if you’ve got any spare cash. It’s foolish not to.
However if you do forget they’ll still be there next year. And the good news is the tax-free limits are increasing to £7,200 for ISA allowances in total and £3,600 for cash ISAs. So there’s always next year.

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