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Keeping your savings tax-free

Making use of tax efficient accounts and allowances

Interest savings rates have been low for quite some time now, so when deciding on where to invest your hard earned cash your priority is more likely to be the best interest rate and return on your investment rather than the tax implications of the savings vehicle. However, the tax incentives out there should not be overlooked to ensure that as much of your money is kept in your hands rather than the taxman’s.

Individual Savings Accounts (ISAs)

Those aged 16 and over and who are UK resident can invest in cash ISAs and for those aged 18 and over who are also UK resident, they also have the option of investing in stocks and shares ISAs. There is an individual maximum annual investment limit of £20,000 applicable from April 2017. Interest earned is completely tax-free, i.e. no income tax or capital gains tax.

First time buyers can use help-to-buy ISAs to save a deposit on their first home. Along with an initial deposit of £1,000, £200 a month can be saved and, subject to certain conditions being fulfilled, the government will add 25% up to a cap of £3,000. So, for those who are able to save the maximum each month, the government will top up the account with £50 for every £200 saved. A maximum limit of £12,000 can be invested, which would allow a couple to save up to £30,000 tax-free, including a £6,000 bonus (£3,000 x 2), to put towards purchasing their first home.

On 6th April 2017 the lifetime ISA, the LISA, was introduced as an alternative way of saving for retirement. It is available for those aged between 18 – 39 and who are resident in the UK. It is not possible to open a LISA on your 40th birthday onwards. Each year £4,000 can be invested until you reach the age of 50 and the government will add a 25% bonus up to a maximum of £1,000 per year. It is therefore possible to achieve £32,000 of government bonuses which can then be withdrawn tax-free once you have reached the age of 60. Funds withdrawn before hitting 60 will be subject to a 25% charge unless you are buying your first home or are terminally ill, with less than 12 months to live. Investment can be held in cash or stocks and shares, or a combination of both.

Junior ISAs can be taken advantage of for children who are UK resident and under the age of 18. They are similar to adult ISAs and there is a maximum investment limit of £4,128. Parents and grandparents are therefore able to make tax-free savings on behalf of their children/grandchildren.

National Savings and Investments (NS&I) premium bonds

Whilst not conventionally an investment, premium bond winnings are tax-free. Odds on winning a prize are 30,000-1 and there are a limited number of monthly draws for a range of prize values reaching up to £1 million.  Whilst the annual prize fund interest rate has dropped to 1.15%, premium bonds still remain very popular.

Tax allowances & rates

The Personal Savings Allowance (PSA) enables basic rate taxpayers to earn up to £1,000 in savings income tax-free. This is halved to £500 for higher rate payers. In addition, there is a starting rate for savings which is 0% on a maximum threshold of £5,000. This is restricted however by £1 for every £1 of non-savings taxable income that exceeds your personal allowance.

Example:

In 2017/18, Katrina has employment income of £15,000 and interest on savings of £200.

Katrina’s personal allowance of £11,500 is fully used against her employment income and the balance of the income of £3,500 reduces the starting rate for savings by the same amount. The remaining starting rate is £1,500 (£5,000 – £3,500) and exempts the £200 from tax.

By Andy Vessey

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