Savings And Saving Tax
For many, the main focus of savings is on retirement – aiming to fund a reasonable standard of living at the end of your working life.
Tax reliefs encourage saving through pension plans – with tax relief at up to 40% on your own savings and a tax deduction for your employer. However, contributions to tax-advantaged plans are limited and you need to be aware that:
- 2005/06 savings need to be invested by 5 April 2006
- personal pension premiums to be carried back to top up 2004/05 savings need to be paid, and claimed, by 31 January 2006
- retirement annuity premiums paid up to 5 April 2006 can be carried back to top up 2004/05 savings, and use any unused relief for the previous six years.
Pensions ‘A-Day
You should also be aware on 6 April 2006 many of the current restrictions on pension savings are removed. If you are considering setting aside a substantial sum of money for investment on or after 6 April 2006, make sure you invest it somewhere where it can be working for you in the meantime.
In 2006/07, you could invest as much as you want, with tax relief up to your total earnings or £215,000 (whichever is the lesser) in your pension plan.
The general rule for pension plans is that the savings are invested in a largely tax-free environment – with capital gains and income largely escaping tax. There is therefore a tax relief on your investment and, for the most part, income and gains accrue tax-free.
Efficient Regular Saving
Because your tax-advantaged pension savings are locked in, you should consider some more accessible savings. These may not offer the same tax breaks, but the funds can be more readily available – with the timetable varying from the time it takes to make a withdrawal from your bank to the time it takes to sell an investment property – to meet any need or goal along the way to, or beyond, your retirement.
Small, regular amounts can be saved in Individual Savings Accounts (ISAs). With a limit of £7,000 on annual savings, a couple could save £70,000 by the time the current limits next come under review in 2010. You have until 5 April 2006 to make your 2005/06 ISA investment. Gains and most income in an ISA are tax-free.
Regular sums can also be invested in National Savings (some products offer a tax-free return, which is particularly attractive to 40% taxpayers), banks and building societies. Those willing to accept the possibility of greater risk perhaps equalling greater reward might consider the stock market, stock market-linked investments or buy-to-let property.
