Financial Planning Matters… a monthly insight with Jonathan Beardmore, an IFA at Pearson Solicitors and Financial Advisers.
OVER THE last few weeks my temperament has gone from mild irritation to simmering rage and back again as politicians have tried to smear each other using the term “tax avoider”.
While politicians are busy with their playground antics they have succeeded in confusing the whole nation as to what is illegal and what is just prudent planning.
Firstly tax avoidance in not evasion in the same way sticking a gun in the face of a cashier is not a simple cash withdrawal from a bank.
Avoidance is the arranging of assets to be as tax efficient as possible, whereas tax evasion is highly illegal and can result in prison.
For most people tax avoidance is as simple as using their ISA allowance or making a pension contribution.
For more complex individuals, Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs), can save an individual a lot of tax.
These are not “loop holes” as has been suggested in some quarters but rewards for desired behaviour imbedded in our tax code.
Giving tax advantages to ISAs and Pensions lifts a huge burden off the state as people become self-reliant and take control of their future.
VCTs and EISs provide an immensely valuable stream of capital that hugely benefits the economy by supporting small business.
Using your tax allowances can be enormously valuable – tax relief given to a higher rate tax payer in a cash ISA will generate 40 per cent more in returns! When you add years of compounding this figure is even greater.
If you decided to use a pension as a saving vehicle benefits are greater still because you save on income tax from your contributions going in to the pension.
A VCT or EIS, although very risky in its nature, can generate huge returns and solve a lot of tax issues far beyond the scope of this article.
So don’t be put off by all the political mudslinging – making sure you are tax efficient is every bit as vital as starting to save and invest in the first place.