Three more days to use your tax allowances

You have until Saturday to take advantage of the tax allowance for the current 2013-14 tax year. It ends on Saturday 5 April. If you’re asking “so what?”, bear in mind that UK taxpayers waste as much as £4.7bn every year by being inefficient with tax and not making the most of the allowances that the government hands them.

In fact, the average amount each taxpayer wastes is £161, according to research by Unbiased, a site that promotes professional advice. For starters, it says some 49 million bank account holders will waste more than £1.1bn by not moving their money into tax-efficient individual savings accounts. If you have savings or just some money on deposit, then not putting it into an Isa will cost you. How? Simply because you pay tax on savings kept outside an Isa.

The tax is charged at your normal rate. So if you’re a standard taxpayer, 20 per cent of the interest you earn on your savings is handed to the government. If you’re a higher rate taxpayer, you’ll lose 40 per cent of your interest.

Put it this way, if you have £5,000 of savings and earn 3 per cent, you’d get £150 interest in an Isa. Outside you’d get either £90 or £120, depending on your tax rate. If that extra £60 (or £30) doesn’t seem worth the bother then bear in mind that it really is very little bother opening an Isa. You can do it online very simply.

Anyone over 16 can have a cash Isa while you need to be 18 to have an equity Isa, where your savings are put into shares or investment funds. You can put up to £11,520 into the latter, or half that figure (£5,760) into a cash Isa in the current tax year.

However, from 6 April the allowance climbs to £11,880 (or half that in cash) before the new Isa (announced in the Budget earlier this month) comes into effect in July, when you’ll be able to top up the total to £15,000, in cash or equities.

If you have a fair amount of savings, it’s worth moving fast to use this year’s allowance. if you haven’t used it by midnight on 5 April, it’s lost.

Which Isa should you choose? If you simply want a cash Isa look for the highest-paying one. If you want an equity Isa then you should think carefully about which one.

Jason Hollands, of Bestinvest, advises don’t hurry to select your investment. “A rushed decision on which asset class, market or fund to invest in could backfire,” he warns.

John Blowers, head of Trustnet Direct, suggests avoiding one share or fund, as it increases risk. “A portfolio should spread exposure around various geographic markets and assets, helping balance out the peaks and troughs. With talk of a market correction still rife, this takes on added significance.”

If you have kids or grandchildren then there’s a Junior Isa where they can build up cash free savings. You can invest up to £3,720 per tax year into a Junior ISA and once opened, any friend or family can contribute. In the next tax year the allowance climbs to £3,840 on 6 April and then to £4,000 from July.

There are more complicated tax-free investment opportunities such as enterprise investment schemes and venture capital trusts. But these can be very high-risk and should only be entered into after discussing them with an expert.

However, you could also be more tax-efficient by planning for future inheritance tax demands or avoid paying unnecessary capital gains tax.

“You can crystallise gains from selling assets of up to £10,900 this tax year without having to pay any tax,” points out Mr Hollands. “The CGT allowance is often overlooked.”

If you take profits on investments above £10,900 a year you’ll be charged tax at either 18 per cent or 28 per cent. You have to pay capital gains tax on profits made from selling assets, the most common of which are shares, unit trusts or buy-to-let property.

To avoid any last-minute problems, invest online – most Isa providers will still accept applications up to about 11.30pm on Saturday night. You’ll need to have applied by then to allow time for it to be processed by the midnight deadline.