Tax is an important factor to consider when you’re choosing investments. How much tax you pay may affect how you invest. For example, there might be little point looking for a tax-free investment if you don’t pay tax anyway; but if you are a taxpayer, it usually makes a lot of sense. You could also find that the money you make from your investments might actually put you into a higher tax bracket, so you may need to plan to avoid this.

Remember your tax position may change as you get older, change career, or face life changes like the birth of a child. For instance, if you are a higher rate taxpayer now, will you still be in a few years time?

And as well as paying tax on almost everything whilst you’re alive, you could leave behind an inheritance tax bill when you die!

There are ways to reduce and even avoid some taxes, so you should make sure your investment strategy fits your tax position and you’re aware of the effects on your savings and investments, both now and in the future. Please be aware that tax rules may change in the future.

The main taxes you need to think about are:

If you’re a taxpayer and you get income from an investment (including a savings account) you’ll normally have to pay tax on it, although the chances are some or all of the tax will be deducted before the payment reaches you.

If you’re not a taxpayer you may not necessarily be off the hook. You’ll need to check that your investment income doesn’t turn you into a taxpayer – careful planning can help you avoid this.

The income from the following is generally received with some tax already deducted which covers the liability of a basic rate tax payer, but higher rate taxpayers may be liable for more tax:

• The interest on your savings accounts
• Share dividends
• Income from a unit trust and similar funds
• Investment bonds
• With-profits bonds.

Income from Gilts (Government loans) is paid in full. So taxpayers will still owe tax.

• Investments held within an ISA (Individual Savings Account)
• National Savings certificates.

Please be aware that tax rules may change in the future.

Products on which income tax is not payable include:

This is the tax you may pay on certain types of investments, or other assets, when you sell or cash them in. You may not pay Capital Gains Tax (CGT) on the whole profit. When you sell your main home there is no liability to CGT, although you may have to pay it on, for example, buy-to-let investments.

The good news is that each year you have a CGT allowance. If your gain is less than the allowance, there is no capital gains tax to pay. For the 2008/9 tax year the allowance is £9,200. Please be aware that tax rules may change in the future.

There are often ways to reduce your CGT. These depend on the type of investment you have, whether it’s in joint names (as we each have an allowance before it’s payable) and if there are any ways some of the liability can be offset.

Knowing when you have to pay CGT, and how to reduce or avoid it, can be tricky to get your head around. So the best advice we can give you is to speak to a financial adviser if you think there’s a chance you could be liable. They will be able to tell you if you are, and how much you are likely to have to pay.

This is a tax that could be payable by your family when you die. The amount of any tax payable depends on the value of your ‘estate’ when you die. This is basically the value of everything you own, plus the value of certain gifts you might have made in the 7 years before you die, less what you owe. It can include all your assets such as any savings and investments, property, car, jewellery etc. The current ‘threshold’, or allowance, is £312,000 (2008/09 tax year) and this usually increases every year. Everything over this amount could be taxed at 40%.

Inheritance tax is not payable if you leave your estate to your spouse or civil partner, but may become payable when they die. But if you leave it to your children or a friend they could get caught out, especially as this tax usually has to be paid before they can receive anything you have left them (in the same way you could be liable on any inheritance you might receive).

Whilst inheritance tax used to affect only the very rich, rises in house values in recent years have made the estates of many people who wouldn’t consider themselves as wealthy, potentially liable for inheritance tax. 

The good news is that there are ways that you can reduce your potential liability or even eliminate it altogether. Please be aware that tax rules may change in the future.

If you would like to find out if you are potentially liable for inheritance tax, or how to plan to reduce it, you should speak to a financial adviser.

If you don't have a financial adviser you can find out more about the different types of advice available as well as your nearest financial adviser.