While tax implications shouldn't be the only thing in mind when choosing your investment, there is no harm in considering savings vehicles that reduce your tax bill.
First of all lets take a quick look at Capital Gains Tax (CGT). One of the key announcements made in Alistair Darling's pre-Budget report was that the rules of this tax will change as of 6 April this year.
A new 18 per cent flat rate is to replace the current system of taper relief which allows investors to pay as little as 10 per cent CGT on profits from the sale of assets in any unlisted company or publicly listed firm they work for, as long as they have held them for two years.
This new flat rate will also apply to capital gains that are not eligible for taper relief, such as the profit made from buying and selling shares in a quoted company.
ISAsIndividual Savings Accounts (ISA) are a popular tax-efficient savings vehicle, with more than 17 million people in Britain now keeping their money in one.
The attraction of taking out an ISA is that the proceeds are tax-free. Investments held within an ISA are not liable for capital gains tax, nor do any dividends you receive from them have to appear on your income tax form.
However, there are limits to how much money you can put in. Up until the 5 April you can invest up to £7,000 tax free and can choose between a maxi or mini ISA. After the 6 April, the rules surrounding ISAs will change slightly: There will no longer be a distinction between maxi and mini and investors will be able to invest up to £7,200 - up to £3,600 of this can be held in cash, or the whole amount can be invested in stocks and shares.
Venture Capital TrustsVenture Capital Trusts (VCTs) were introduced in April 1995, designed to encourage the indirect investment in a range of small higher-risk trading companies who are looking for further investment to develop their business.
Investors in VCTs are entitled to 30 per cent tax relief, which means that every £10,000 you invest will only cost you £7,000, although this relief only applies when you invest in new issues of shares in a VCT or top-up, not second-hand VCTs. There is also the added benefit of there being no income tax to pay on any dividends, nor are you subject to tax on any capital gains made on the investment.
However, as with any investment, there is a form of risk involved. Because you are investing in smaller companies you must be prepared to take a long-term view - usually between 5-10 years - and any income derived from it is certainly not guaranteed.
Saving for retirementThe State Pension currently provides a single person with £87.30 per week, which means that it is important we start saving for retirement as soon as possible.
One of the most popular method is a Self Invested Personal Pension (SIPP) - a DIY pension with the added advantage of being very flexible.
With a SIPP you choose your investment from a wide range, such as, individual shares, stock market and property funds, futures and options, REITs, unquoted shares, gilts (government bonds) and company bonds, cash and commercial property.
When you reach the minimum age of retirement, currently 50 but will be raised to 55 after 2010, you are able to take out 25 per cent of the fund as a tax-free lump sum and use the remained to provide a retirement income, either through an annuity or an income drawdown, which will be subject to tax.
When it comes to tax relief, there are limits to how much you can invest. If you are a taxpayer you can contribute 100 per cent of your earnings before tax up to a limit of £225,000 for the 2007/08 tax year (this limit will increase £10,000 every year until 2010/11). If you aren't a taxpayer you can contribute up to £3,600 per year into a SIPP and still get basic tax relief. Basically, this means that you pay £2,808 and the taxman will add £792.
Your pension fund is also able to grow free of tax so any rise in the value of the scheme's assets between what you put in and what they're worth at the end is called capital gains and is tax-free.