A Guide to Tax Free Savings
How to Use ISAs, Pensions, CTFs & Savings Accounts to Save Tax Free
Oct 9, 2009
The interest rates on savings accounts aren't currently that impressive. Consumers with money to save often find that a lot of the interest that they can earn gets eaten up by the tax they have to pay. There are, however, a range of tax free savings options that may be worth considering to avoid this happening.
ISAs (Individual Savings Accounts)
ISAs have been around since 1999. These accounts allow an individual to save money and/or invest in the stock market in specially designed accounts. Any interest that is earned from ISA accounts is paid tax free.
These accounts have savings/investment limits imposed on them. So, for example, an individual is given a tax free ISA allowance of up to £7,200 a year. Up to £3,600 of this can go into a cash ISA. The rest, or alternatively some or all of the total allowance, can be used in a stocks and shares ISA. Individuals aged 50+ in the 2009/10 tax year are now allowed to save up to £10,200 (to a maximum of £5,100 in a cash ISA). The extended allowance will apply to everyone else from April 2010.
(NS&I) National Savings & Investments
Accounts from NS&I are managed by HM Treasury. Individuals that invest in their products will basically be investing in the government. Some of the options on offer here are designed to give tax free savings. These include:
- Premium Bonds
- Index-Linked Savings Certificates
- Fixed Interest Savings Certificates
Although a consumer can access their savings when they like with NS&I savings certificates products, these are often viewed as medium/long-term savings as the best returns will come over time.
CTF (Child Trust Funds)
CTFs are savings accounts for children that are funded by the government. These accounts were set up to help children get a good start to their adult lives and are designed to be accessed once the child turns 18.
Parents with a child born on/after 1st September 2002 are given a voucher from the government to open an investment or savings account for their child. They will also get an additional voucher when the child turns 7. Low income families qualify for additional funding. An extra £1,200 a year can also be put into the account by family or friends of the child or by the child itself every year.
Tax Free Savings and Pensions
Although individuals may be taxed on part/all of their pension payments when they start to be made, they may benefit from tax free savings benefits before this point. Pension contributions are not taxed while a fund is being built up via the tax relief system. So, individuals that have a personal pension and that use money that they have already been taxed on to pay into it can claim it back in tax relief up to limit of their pension allowance.
Income Tax Allowances and Savings
As well as thinking about tax free savings, some individuals can also use their tax allowance to save money. Each individual in the UK can earn up to a certain amount every year before they are taxed. This rate currently stands at £6,475 for the 2009/10 tax year. Those who are not tax payers or who earn under their limit do not have to pay tax but, if they have standard savings accounts, their bank/building society will tax their interest automatically
A non-tax payer can use an R85 form (available from their bank or building society). This will prevent the bank/building society from taxing interest at the source. Those with low incomes may also want to see if they can claim back any of the tax they may have paid on standard savings accounts.
Just because these savings options come tax free doesn't mean that consumers should forget about checking out all their options before taking one out. ISA interest rates, for example, can vary a lot and comparing savings accounts deals and offers may be well worth doing before choosing a product.
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