Higher rate taxpayers can take advantage of many valluable tax breaks to save tax.

ISA

The ISA is especially efficient for higher-rate tax-payers.  As well as the valuable Capital Gains Tax (CGT) Saving, it also shelters against margin income tax.

You may invest £7000 into a maxi ISA in 2007-2008 or £3000 into a Mini-ISA.

You may withdraw a regular "income" at any level and withdraw any lump sum without triggering any tax charge.

Unit Trusts and OEICS

Once a higher-rate tax payer has used up their annual ISA allowance, they should consider open-ended investment company shares (OEICS) and or Unit Trusts.

Open ended investment companies (OEICS) are simply a more modern variation of a unit trust based on new legislation that allows the manager greater flexibility.  This often gives a cost saving to the manager which can be passed on the the consumer in lower charges.

Higher rate tax payers should apportion their portfolio wisely between the ISAs and their OEICS so that the highest yielding funds are held within the ISA.  For the OEICS holdings they should look for lower-yielding funds.

OEICS and Unit Trusts held within ISA accounts or directly give investment return in two ways

• Usually the greatest return comes from capital appreciation in the unit price however, this is the least reliable as it is driven by market forces.  One year you might get 15%, another year 8% another year you might make a loss.
• Investment yield is the income generated by certain but not all underlying assets.

Many overseas funds give very high captial growth but no yield at all.

Many smaller companies funds provide little yield.

Higher yielding funds tend to invest in blue-chip shares of the top 250 companies.

A high yield is very nice but if you are a higher rate taxpayer and your fund is not held in an ISA then you will pay tax on it at 40%. 

Indepepenent Financial Advisers will therefore recommend higher rate taxpayers look towards low or nil yielding OEICS and Unit Trust funds to avoid paying extra higher rate tax.