Investments And Basic Rate Taxpayers

Paying tax on investments is often very simple since, with many, tax at the basic rate has already been deducted when you receive or are credited with income (though you still have to declare it on your tax return). Consider investments which offer a tax-free return if this would be higher than the taxed return from other investments. And, if you're not fully using your capital gains tax allowance, consider investments where the return is in the form of capital gain rather than income.

This is the company's own tax that's been paid; you can't reclaim it. But the tax has come out of the pool of money otherwise available to investors so the company's tax bill is an influence on the return you get. At present, the company's tax is higher than the amount a basic rate taxpayer would otherwise have paid. This means that, other things being equal, you'd be better off investing in, say, unit trusts (where you pay tax directly on the return) than in unit-linked life insurance. From 1 January 1990, it's been proposed that the situation changes slightly. If the proposals (made in the 1989 Budget) become law, insurance companies will then pay tax at a lower rate than now. Basic rate taxpayers with unused capital gains tax allowance might then still do better with other investments, but if you've no unused allowance left, investment-type life insurance could be just as good. The Government is also considering ways of simplifying the way in which tax is paid on life insurance.

Investments and Higher rate taxpayers

The 1988 Budget, which cut the top rate of income tax from 60 per cent to 40 per cent and brought the tax rates on capital gains and income into line, has made life much simpler. Your main concern nowadays is to make sure that you make full use of your capital gains tax allowance so as to minimise your total tax bill. Also consider investments offering a tax-free return (such as National Savings Certificates) or largely tax-free return (low coupon' or index-linked British Government stocks, say). As long as you've used your capital gains tax allowance, consider investment-type life insurance too; with most policies for regular saving, there's no tax for you personally to pay, and the life company will have paid tax at a lower rate than you would have had to otherwise.

Click here for more information on Unit Trusts

Investments And Non-taxpayers

If you're a non-taxpayer, because you have unused outgoings or allowances, you should normally avoid certain investments where income is paid with tax already deducted and the tax can't be reclaimed. This is the case with most deposit-type investments such as bank and building society accounts, and investment-type life insurance schemes. But always make sure that the before-tax return you can get elsewhere is higher than the taxed return you're giving up. Investments paying income with tax deducted but where you can reclaim the tax may not be very convenient and you may have to wait some time before... see: Investments And Non-taxpayers

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