We all have our own unique financial goals. Most need savings to achieve them.
Of course, stashing cash under the mattress is not the best way to save. There are plenty of savings products that can help your money grow faster by paying you interest. But the tax man will want to help himself to a share of the interest your money earns.
The good news is that not only are there are some ways to save that the taxman can never touch, there are a few which will actually make him give you money to swell your savings pot.
Your Personal Savings Allowance
With an ordinary bank or building society savings account, you pay tax on your interest. If you earn £100, you’ll only receive £80 after basic-rate tax, or £60 if you are a higher rate taxpayer. You may not even be aware of it as your savings provider makes these deductions before they reach your account.
The new Personal Savings Allowance changes all that. Basic-rate taxpayers will be able to earn £1,000 in savings interest before paying any tax, and higher-rate payers £500.
But there are ways to save even more – and get the taxman to contribute.
An ISA is an Individual Savings Account. There are several types of ISA, but all protect your savings from tax. Everyone over 16 in the UK over 18 has a £15,240 ISA allowance they can save into ISAs this year. Next April it increases to £20,000
A Cash ISA is really just a savings account that doesn’t pay tax. Choose an Easy Access ISA and you can take your money out at any time – but be careful, once it’s out, you can’t put it back in – you are limited to your annual ISA allowance.
Rates are not too exciting right now, but if you shop around you can get more than 2%. Don’t worry if you’ve opened one in previous tax years, you can open another with whichever provider you choose. And if the rate is poor on your old ISA you can transfer it to the new one.
A Stocks & Shares ISA is very different to a Cash ISA, which is simply a savings account you don’t pay tax on. With a stocks & shares ISA you’re investing in corporate and government bonds, where you lend your money in return for interest, shares in individual companies or funds, managed investments.
There are many different types of stocks and shares ISA available, but you are investing, not saving – there are potentially bigger returns, but your money will be at risk. They have no tax on interest, although dividends are taxed.
Help to Buy ISAs
Help to Buy ISAs are ISAs – but with a special extra. The taxman doesn’t just let you save tax free – he will provide you with a bonus. Help to Buy ISAs are only available to potential first time buyers. They must be a UK resident, and the property must be purchased with a mortgage. It cannot be a second property, or for buy-to-let.
Interest on Help to Buy ISAs is free of both income and capital gains tax. However, when an individual takes money out to buy a home, the government will add 25% to whatever is in the account, up to a maximum of £3,000. Anyone buying with a partner could receive a government bonus of up to £6,000 towards their first home.
If there is no house purchase, savings will continue to earn interest, but without that very appealing bonus.
Investment is limited to an initial £1000 (which can be a transfer from an existing cash ISA) and £200 per month. would take more than four and a half years to save £12,000 and get the maximum bonus. Of course, with interest, things go a little faster – and whatever the rate offered, the bonus will ensure the Help to Buy ISA is likely to beat any other Cash ISA.
The Lifetime ISA is a savings account that will also allow you to save towards your first home. However, as the name suggests, it is a lifetime scheme. You can also use it to save for your retirement.
You can save as little or as much as you want each month, up to £4,000 a year. The government will then provide a 25% bonus on these contributions at the end of the tax year. This means those who put in the maximum each year will receive a £1,000 bonus every 12 months from the government.
Savers will be able to make contributions and receive a bonus from the age of 18 up to the age of 50. So someone could, in theory, end up with £32,000 worth of bonuses, assuming they were fortunate enough to be able to pay in the maximum £128,000 over 32 years. If you can afford to lock away your money it could be a really worthwhile way to build up a major sum.
By understanding which products are the most tax-efficient, you can make the most of your savings and investments, and minimise how much tax you pay.
The Financial Conduct Authority does not regulate taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change.
The value of investments can go down as well as up and you may not get back the amount invested.