Investment supplement: what can I get tax-free?

Ever since the Bank of England base rate has been languishing at its record low of 0.5 per cent, finding tax-free places to put away cash has been a crucial boost to returns.

And this year, since the spectre of the general election in May means the tax rule book could be ripped up once more, anyone who can afford to capitalise on current reliefs should do so soon.

That’s why the banks also get so titilated about this time of year, plastering buses with adverts about their paltry-rate Individual Savings Accounts (ISAs) as if their interest rates—which currently stand at an average 1.45 per cent—are something to get excited about.

Unfortunately, if you’re after a tax-free savings product where your money is guaranteed to be safe, cash ISAs are the best option around. The allowance is at least substantially more generous this year: individuals can now save up to £15,000.

The vast minority do not: two-thirds of British adults, or 33m people, have neglected to save or invest any money into ISAs this year, according to Axa Self Investor, an investment ISA firm. That remains the case even though inflation’s fall to 0.5 per cent in January means it is now far easier to find an ISA that beats the effect of rising prices. After years of no-returns, 208 out of the 211 cash ISAs on the market currently pay out inflation-beating levels of interest.

Sure, the rates still aren’t exactly generous, but if you hold a cash ISA in an institution covered by the government’s £85,000 savings guarantee, your money is at least secure and generating a return for you alone, not the Inland Revenue. Far better to nab these meagre rates than pay income tax on funds held in a traditional (and similarly ungenerously-rated) savings account. That’s one reason why now is also a good time to do some old-ISA housekeeping: cash stashed away in previous years should be put to work just like this year’s allowances. Never withdraw old ISA funds to re-invest in a new account—you’ll lose the tax-free wrapper. Instead, you’ll need to ask the institution you want to switch to to carry out a transfer and safely move the money on your behalf. Don’t accept the first deal offered by your high street bank: some big names pay out just 0.1 per cent on balances, meaning putting in this year’s entire allowance would earn only £15 interest over the year.

The new freeing-up of ISAs—when the government last summer decided that Britons are big enough to decide what to do with their money—also means that investors can gamble all, none or any proportion of the £15,000 allowance on the stock market or in funds inside a tax-free wrapper.

Analysis by the fund manager Fidelity proposes that even if you’ve never invested in a stocks and shares ISA but begin to do so today, you could be a millionaire within 25 years. That supposes investing the maximum cash each year with investments growing at 5 per cent each year—quite a supposition: the nature of investing means you could lose all your cash. But if you do go down this route, be sure to do so in the cheapest possible way. Opt for the most inexpensive platform, such as a DIY investment website, and you’ll cut out some of the fees that erode your rewards.

Another option to shelter funds from the taxman is to give away money to offspring—cash and fixed-interest funds in the Junior ISA are tax-free and the limit before 5th April is £4,000—or saving with the government-backed NS&I. Its index-linked certificates only occasionally go on the market, but Premium Bonds are always tax-free.

Then there’s pensions: individuals currently receive a tax-free allowance worth up to £40,000 and can carry forward up to the past three years’ unused allowances too.

For those willing to bear more risky investments and their resultant sleepless nights for potentially-higher returns and possibly having more fun with your money, schemes like Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) are worth pondering.

They provide tax relief of 30 per cent and tax-free gains, and allow you to invest up to £200,000 (VCT) or £1m (EIS) in some of the UK’s most entrepreneurial and vibrant—and risky—small companies.

Be careful where you put your money, but in this ungenerous financial world tax-free investments are more important than ever.