Money Makeover

Follow our quick guide to structuring your financial affairs more tax-efficiently.

Tip 1
If you are married or in a registered civil partnership, you could potentially increase your tax-free income by switching assets that produce income into the name of the person who has not used all of their personal tax allowance. If you are both under the age of 65, you can currently each receive up to £6,475 (2009/10) a year before income tax is payable. For the over-65s there are even higher allowances available.

In addition, if one of you pays tax at the higher rate, it could be worthwhile considering shifting assets into the name of the other spouse or partner, who might be a basic rate or non-taxpayer.

Tip 2
If you have not taken advantage of your tax-friendly cash ISA (Individual Savings Account) allowance, you are missing out on receiving interest that is paid free of tax. Also, starting from 6 October this year if you are over the age of 50, and from 6 April next year for everybody else, you will be able to save up to half of the new increased ISA allowance, i.e. £5,100 (currently £3,600), or £10,200 for a couple, in a cash ISA.

Tip 3
Many investments give you the option to receive income payments monthly, quarterly or annually, and usually, the more frequently you take income, the lower the interest rate. If this is true of your particular situation, you can maximise the amount of income you receive if you take an income only when it is required.

Tip 4 
It is important continually to monitor your investments. If you have acquired different savings and investments over the years, especially in this current economic climate, it is vital to review them regularly to ensure that they meet your investment objectives, i.e. provision of income or growth or a combination of the two. For example, if you have low-yielding investments it may be appropriate to replace them with funds that potentially give you a better income.

Tip 5
You can currently shelter up to £7,200 in an ISA that invests in shares. These ISAs can be used to buy unit trusts, investment trusts and OEICS, with any income paid free of further income tax. The annual limit is set to increase to £10,200 from 6 October this year for those over 50 years old and for everyone else from 6 April 2010.

Tip 6
Make sure that you are claiming any benefits or tax allowances to which you are entitled. If you are a non-taxpayer make sure that you have registered to receive bank or building society interest gross by completing tax form R85. If you are planning to retire this year you could also be entitled to the repayment of some of the income tax you have already had deducted through the PAYE system. To reclaim any overpayment, you will need to complete a P50 claim form.

Tip 7
If appropriate to your particular situation, consider an investment bond that could be set up to provide you with an income either monthly, quarterly or annually. The underlying investments are taxed, but there is no further income tax payable on distributions of up to 5 per cent of the original sum invested each year. HM Revenue & Customs treats this as a return of the original capital, spread over 20 years.

Tip 8
Selling a few units or shares each year from an investment portfolio may offer another way to generate additional income but care needs to be taken not to erode the value of your capital.

Tip 9
Make sure you are fully funding your pension. Contributions are exempt from tax, which means that you can reduce your income tax bill by putting extra cash into your pension. The money will be deducted from your pre-tax income.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.