Now I’m not one to encourage smoking or the mass-uptake of the habit by society, but I couldn’t help but wonder what the true story is for the UK economy. I caught a sound-bite from an unknown politician a day or so ago saying something along the lines of “We must eradicate smoking from this country, or suffer the bankruptcy of the NHS.”

Bold words, and an excellent soundbite; it pushes the blame for the National Health Service’s problems onto someone other than the government.

But is the state of the NHS really the fault of the smokers?

Smoking Related NHS Expenditure

The NHS doesn’t keep statistics on what is and what is not ‘smoking related’, so there is a degree of artistic license in painting such figures.

In 2009 a Freedom of Information Act request  sent to the NHS estimated that £1.7 billion pounds a year is spent by the NHS on treating smoking-related conditions. The BBC in 2008 estimated it at £2.7 billion.

Revenue from Cigarette Taxes

There are two government revenue streams from cigarettes; Excise Duty and VAT. Approximately 89% of the retail price of a packet of cigarettes goes to the treasury, rather than the manufacturer or retailer. In 2010/11 (bearing in mind cigarettes have gone up twice since then in the 2011 and 2012 budgets – but that is the latest statistic available at present) the treasury profited by £11.1 billion pounds.

We could also say there is a third revenue stream when retailers sell to underage purchasers, and get caught out by police or local authority trading standards agents, with fines applied both on-the-spot of £80 a pop, and larger court-imposed fines when taken further or for repeat offenders. This would be difficult to quantify, however and has been ignored for the purposes of this article.

So, even if we revise the NHS smoking-related costs upward a couple of hundred million to £3 billion, that’s still a net profit of £8.1 billion to the treasury overall.

Benefits Beyond Taxation

I’m going to be a little tongue-in-cheek here, but it is food for thought all the same. Smoker’s on the whole live shorter lives than non-smokers. An unpublished study by a large (>5,000 employer) government organisation (you’ll have to take my word for this one) found that smokers take less sick days than non-smokers (which is why it wasn’t published!), work longer hours overall and are more amenable and adaptable to short-notice changes.

So smokers despite their occasional breaks from the workplace are more focused. They work longer hours thereby effectively negating those additional breaks, are more adaptable and won’t be a drain on their pension for 40 years.

Sounds like a winner all round to me?

So why is the government push push push when it comes to making people quit?

For a long while eBay has been a haven for sleep-deprived parents, retired folks, and those with a creative hobby to generate additional income on top of whatever their day job may provide. The proceeds were dealt with entirely digitally, avoiding the usual scrutiny of Her Majesty’s Revenue and Customs.

Until now.

That isn’t to say those who did so were deliberately avoiding their tax liabilities. It is more a case of not even realising that they may have any to begin with, based on their activities. Those who trade on sites such as eBay now have until June 14 2012 to tell HMRC that they wish to take part in the new ‘amnesty’ scheme, and until September 14 to give details of the tax owed and to arrange for payment.

John Cassidy, tax investigation and dispute resolution partner at PKF, the accountants, said:

“Any individual who regularly acquires or makes items and then sells them online for a profit should take note – you’re likely to be considered an online trader by HMRC and should disclose any profits you make on your tax returns. However, anyone simply selling off the occasional personal item that they no longer want is unlikely to be trading.”

If you’re worried you may get ‘found out’, then perhaps being upfront is the best option. HMRC have said that you may owe as little as nothing, to 10% of the tax owed. On the flip side if you don’t volunteer, they could sting you for 100% of the tax owed and a criminal investigation to boot. Their press department assures us that additional investigators have been taken on in a bid to uncover these traditional tax-avoidance havens using a ‘variety of data sources’.

You can enrol here, but before doing so I strongly recommend you speak with a qualified tax assessor and accountancy.

Paying tax may be something that we all have to do, and there might not be any way to get out of it, but there’s no reason to pay more than you absolutely have to. Take your savings account as an example: chances are that if you’re over 18 and not a student, you’ll be paying tax on the interest you earn on your savings. If you have investments, you’ll most likely have to pay tax on the dividends you earn, right?

However, there are also some interesting investments that you can make that help you to beat the tax man, perfectly legally. Probably the best known, and one of the most popular examples of this, is the stocks and shares ISA. Let’s find out more… 

ISA Investment – The Basics

Many people are already familiar with how a shares ISA works, but here’s a quick overview just in case. Essentially, ISAs offer you a tax-free form of savings. This means that you don’t have to pay tax on any interest or dividends you earn through your investment ISA. This means you maximise your investment and make sure your money is working is hard as it possibly can.

There are a couple of things to note when it comes to shares ISAs: there is an annual investment limit, which means you can only put a certain amount of money into your ISA in a single tax year. The current ISA allowance for 2011/2012 is £10680. You can choose to invest all of this in your shares ISA or split it and put half into a cash ISA instead – it’s up to you.

It’s also worth knowing that there are quite a few different shares ISAs around, from climate change ISAs (investing in companies that have lighter than average carbon footprints) to FTSE tracker ISAs, so it’s worth looking around to see which one would be best for you.

A good option, for many reasons…

But why should you consider investing in a shares ISA? There are lots of reasons you might want to invest your money, my friend Jason started an investment ISA after receiving some money from his family. His parents had downsized their property and, very kindly, passed some of the money they made on the sale down to their son with the aim of helping him get on the property ladder.

Of course, the property market being what it is, even his parents’ generous donation plus what he’d already saved couldn’t finance his mortgage deposit, so he decided to take the chance and go for an ISA with the aim of maximising his investment and eventually raising a deposit. In this case, he chose a FTSE all-share tracker ISA, which invests in all of the companies listed on that index.

Why that ISA? Essentially, he didn’t want to put all his eggs in one basket and was fairly new to investing so spreading the risk over a large number of companies seemed prudent. There were other options, but based on his situation and goals, he decided that one was best for him.

That’s not the only reason people consider investing in ISAs, though. You might come into money due to a competition win, a bonus from work, your own house sale or inheritance. You might be saving for a car, a holiday, your kids’ education, a rainy day… The important thing is making sure you choose the right ISA for your needs.

 Is the risk worth it?

As you probably know, there is a risk attached to shares ISAs. This is because they are investments and, like any investments, they aren’t guaranteed to grow. This means it’s a good idea to evaluate the risk before taking the plunge and do some research into different ISAs to make sure you get one with a good reputation. We can’t deny that some ISAs do underperform; however, the best stocks and shares ISAs are careful about where they invest and even though the economy has seen its ups and downs of late, there are still some very good ISA success stories around.

Also, if you invest wisely, it is possible to spread the risk and limit your chances of an unfortunate investment. For example, there are bonds and gilts ISAs available, which are still investments but are lower in risk than other ISAs attached to the stock market. You could alternatively split your money between a cash ISA and a share ISA, or put some into a regular savings account so you’re limiting how much is at stake.

Plus, there is a risk in not moving your money. It’s said that people are more likely to get divorced than they are to move their bank accounts, and millions of people end up leaving their money in savings accounts where the value is actually going down due to inflation and low interest rates. There might be a risk involved with shares ISAs, but there’s still a good chance your money will grow, unlike many current and saving accounts – and if you look at the performance of many ISAs over the past three years, it’s easy to see that even in challenging circumstances, it’s still possible for significant gains to be made.