Watch the rules to maximise your tax savings

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Valuable opportunities have opened up for people to save tax on their investments. In April the Government introduced a Personal Savings Allowance along with a nil per cent starting rate band for savings income which came into force a year ago.

Many people will now be able to receive £22,000 of their income tax free, if dividend allowance is included, but it is important investors know how the rules work to maximise savings.

Kieron Bassett

Kieron Bassett

There are three main categories of income: savings income, non savings income and dividends. Savings income consists of interest on deposits in banks and building societies, plus income from some life policies, national savings and interest from collective investments along with the interest element of purchased life annuities. Whereas non savings income is mainly earnings, pensions and rental income. Finally, dividend allowance has now come in and this allows you to have £5,000 per annum income from this source before paying tax.

However, the different types of income are taxed in a particular order of priority and that order can make a big difference to the amount of income tax payable. The first priority for income tax is earnings and other non savings income. The allowance here can add up to £16,000 when taking into account a personal allowance of £11,000 plus £5,000 of savings income, free of income tax. Although it has to be remembered that for every £1,000 earned over the personal allowance, £1,000 of tax free savings income is lost. This means if non savings income exceeds £16,000, the saving benefit would be lost. But an added complication is a new savings allowance which in addition allows £1,000 of savings to be tax free if you are under the basic rate tax regime and £500 if you are a higher rate tax payer.

Finally, the Government has allowed dividends from all sources, excluding ISAs which are already tax free, to be tax free for the first £5,000. That could, in theory, bring your tax free income up from £17,000 to £22,000.

Governments attempts to return more to savers and investors in a low interest rate environment has brought up a host of tax planning opportunities. Of course it is important to make sure the investment strategy drives the tax planning rather than the other way round so I would advice you contact a chartered financial planner.