ISA and VCT Deadline Looms!

If you've got any money to save for a rainy day, just a reminder that you have less than a fortnight (5 April) to take advantage of your tax-free ISA and VCT allowances.

Most people nowadays know about ISAs. They allow you to save up to £7,000 a year in cash, shares and/or insurance, in a tax-free wrapper.

The ISA rules allow you to save up to £3,000 a year in a cash mini-ISA. You can also have a shares mini-ISA with investments of up to £3,000 and an insurance mini-ISA with up to £1,000 (though only a few providers offer these).

The alternative is to buy a maxi-ISA. You can have up to £7,000 invested in one of these. This can either be all stocks and shares, or you can mix-and-match with up to £3,000 in cash and up to £1,000 in insurance. Only a few maxi-ISA providers offer all three components, however, so if that is what you want, you may be better off buying three separate mini-ISAs.

VCTs are a lesser-known tax break. They were introduced by the Government in 1995 to encourage investment in new and smaller companies. This can obviously be riskier than investing in well-established businesses, but to make up for this the tax benefits are considerable.

For one thing, all dividends on VCTs are paid tax-free and don't have to be declared on your tax form. In addition, all taxpayers, even those who only pay the lowest rate, get 40% up-front income tax relief. That means if you invest £10,000 in a VCT, your tax bill for the current tax year will immediately be reduced by £4,000 (or you will get a rebate for this amount). Another way of looking at this is that even if your investment only ever returns 60% of its initial cost, you will still have broken even.

One drawback with VCTs is that you have to keep your money invested for at least three years, or you will have to repay the tax rebate. There is also a limited market if you want to sell your shares, though most VCTs will buy them back for a small discount on the market value.

The maximum you are allowed to invest in a VCT this year is an eye-watering £200,000. The minimum investment is set by the VCTs themselves - the lowest I have seen is £2,000, but £3,000 to £5,000 is more common. Some VCTs invest in specialist fields such as wind farms and music concerts, while others are more generalist in their approach. Gordon Brown announced yesterday that the tax breaks for VCTs will continue next year but in a reduced form - so if you want to take advantage of the generous tax incentives in the current year, you do need to move quickly.

If you'd like more info about ISAs and VCTs, there are many websites that can help you. Personally I like Best Invest. They act as independent financial advisers, and if you register through them you will get a discount on the fees charged for any investments you make. Their website has in-depth info and recommendations for current VCTs. And no, I don't get any kickbacks for recommending them! I just use them myself and think they provide a very good service.

Finally, all of the above is for information only. ISAs and VCTs may not be suitable for everyone. If you are in any doubt as to how best to proceed, I strongly recommend consulting an independent financial adviser.