Use tax allowances or lose them

Investors have until the end of the week

WITH the end of the tax year fast approaching, time is running out for you to fully use the tax free allowances on your investments. If you don’t put your money into a tax efficient product by 5 April, this year’s allowance will be lost for good.


CASH ISN’T KING

You can save up to £11,280 into an Isa in 2012-13, of which only £5,640 can be put into a cash Isa. But cash is not king: the average rate on the top five easy access Isas is 2.41 per cent, according to MoneySupermarket, losing you money in real terms. However, if you still prefer the safety of cash, consider fixed-rate Isas. The Halifax Isa Saver Fixed, for instance, pays 3.1 per cent per annum, but you’ll need to tie your money down for a minimum of five years.

To beat low rates, investors can allocate money into a stocks and shares Isa, which offers exposure to investments with potentially better returns. For example, the Invesco Perpetual Distribution fund may be attractive to income-orientated investors; and there are also low-cost trackers, which mirror the performance of an underlying index like the FTSE 100. You can pick individual stocks and shares too. But don’t worry if you aren’t sure what you want. You can still put up to £11,280 into a stocks and shares Isa, leave it in cash temporarily, and select investments when you are ready.

ROLLOVER

You have an annual pension contribution allowance of up to £50,000 (falling to £40,000 in April 2014). Top rate taxpayers enjoy income tax relief of up to 50 per cent on contributions, dropping to 45 per cent from next week.

But you can also carry forward unused pension reliefs from the last three years, meaning that top rate taxpayers could still potentially contribute up to £200,000 into a self-invested personal pension (Sipp) before Friday.

In addition, the lifetime pension allowance will fall from £1.5m to £1.25m. Those with savings between this amount should apply to HMRC for “fixed protection,” to avoid paying additional tax. You have until April 2014 to register, but once you do, you will be unable to make any further tax-free pension contributions in the future.

SOPHISTICATED INVESTMENTS

The seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS), as well as venture capital trusts (VCTs), are tax efficient ways for sophisticated investors to invest into young companies. EIS and VCTs offer 30 per cent relief on income from the investment. The rate of relief is 50 per cent for SEIS.

Investors also have until Friday to use the 100 per cent tax relief on capital gains made from EIS investments. It will fall to 50 per cent next week. But Matthew Woodbridge of Barclays Wealth points out that individuals can still invest up to £2m into an EIS next tax year – £1m in 2013-14 and £1m through a carry back to 2012-13 – which could save up to £600,000 in income tax.

Many execution-only platforms do not offer EIS and SEIS investments. But they can be found through niche providers such as Rockpool Investments. VCTs can be bought through execution-only providers, like Hargreaves Lansdown. And Adrian Lowcock of Hargreaves Lansdown currently likes the Puma VCT 9 fund, which invests into asset-backed firms, which he thinks lowers risk. But there are also more general types of VCTs on offer.