Special Report on Peps and Tax Planning: Saving yourself from the taxman: Alison Eadie looks at schemes that avoid the Inland Revenue

TAX-FREE savings schemes have multiplied in recent years, giving the tax-averse investor plenty of scope for denying the Inland Revenue.

Tessas - tax-exempt special savings accounts sold by banks and building societies - are now into their third year, but are not looking as attractive as they did at launch. The fall in interest rates means that plans paying out a gross 15 per cent or more at the start of 1991 are now paying out around 7.5 per cent.

Higher rates or special bonuses are often paid for the maximum contribution over the five-year life of a Tessa. For example, the Cheltenham and Gloucester Building Society is paying 7.5 per cent on full contributions but 6.4 per cent on those below the maximum.

The total amount payable is pounds 9,000 over five years with a maximum pounds 3,000 payment in the first year, pounds 1,800 in the next three years and pounds 600 in the final year.

To qualify for tax-free interest the money must be untouched for five years but withdrawals are permitted of net interest credited, which is the net equivalent at the basic rate of income tax.

Personal equity plans - PEPs - are in their seventh year and allow investors to shelter equities and unit or investment trusts from income tax and capital gains tax. An individual can now invest up to pounds 9,000 a year in a PEP compared with pounds 2,400 in 1987.

The maximum in a unit or investment trust is pounds 6,000 a year. If added to every year, it is possible to build up a substantial tax-free portfolio. There are few restrictions on how much, or when money can be taken out of a PEP.

Pensions are one of the most tax-efficient, if less flexible, forms of saving. Whether paying into a company pension scheme or a personal pension the investor is credited with the gross amount. For a 25 per cent taxpayer paying pounds 100 a month net, the gross credit in the pension scheme is pounds 133.33. For a 40 per cent taxpayer the gross credit rises to pounds 166.66 a month.

The amount that can be sheltered from tax is limited according to age. There are six age bands. Those aged 35 years or under can pay up to 17.5 per cent of their gross salary if in PAYE employment or to their net relevant earnings if self-employed.

Net relevant earnings are gross income less expenses. Those aged 61 to 74 years can pay up to 40 per cent of their income into a pension plan.

National Savings and Friendly Societies both offer tax-free investments. National Savings Certificates give fixed interest or index-linked tax-

free returns. The 36th issue, with a maximum investment pounds 10,000, guaranteed an 8.5 per cent compound pa rate to holders of five years.

Early encashment means a lower rate of return. National Savings pays gross interest on all its other savings plans, but taxpayers are then liable for tax.

The attractions of friendly societies are limited by the small amount of money which can be paid in - only pounds 18 per person per month. The Family Assurance Society's 'Family Bond' is a tax-exempt unit-linked endowment policy with premiums payable for 10 years.

Finally, a tax-free vehicle that is on the way out. The Business Expansion Scheme will only exist until the end of the calendar year. However, investors can still put in pounds 40,000 for the present tax year and a further pounds 40,000 for 1993/94 which for higher-rate taxpayers offers considerable scope for tax relief.

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