Making the Most of Tax Free Savings

The Individual Savings Account and National Savings Investments

Dec 31, 2008

Tax-free savings can help to build wealth. An Individual Savings Account or National Savings Investment will benefit those who have used their CGT allowance.

National Savings Investments and Individual Savings Accounts (ISA's) are an excellent source of tax-free savings. It helps to understand how personal tax allowances can be used to boost investment returns, particularly if a higher-rate tax payer.

Tax Allowances and Tax-Free Savings

The Inland Revenue allows an investor to benefit from an annual Capital Gains Tax (CGT) allowance of £10,100 in 2009-2010. This means that an investor can make £10,100 from shares, unit trusts and other investments before paying CGT.

During the 2009-2010 tax year it is possible for a single person to earn £6,475 before paying income tax. Every person has a personal tax allowance, but some don't utilise theirs until drawing a pension income.

It is good tax planning to transfer income-bearing investments into a partner's name if they aren't currently paying income tax. Others may benefit from transferring shares into their partners name to minimise CGT.

Stocks and Shares ISA

Inland Revenue rules permit someone to invest up to £10,200 each tax year in a stocks and shares ISA from April 6th 2010. Alternatively, it is possible to invest £5,100 in a stocks and shares ISA and £5,100 in a cash ISA. The most viable option will depend heavily upon that person's risk profile.

Investing in a capital-protected National Savings guaranteed equity bond allows an investor to benefit from tax-free saving without risking capital. Those seeking higher returns may wish to invest in the developing economies of Eastern Europe and Asia.

Cash ISA

Those who are risk-averse or can only commit financially for a few months should consider investing up to £5,100 in a cash ISA. They can accept a variable or fixed-rate, but the latter involves locking up any money for in excess of 5 years.

National Savings Premium Bonds

Between £100 and £30,000 can be invested in premium bonds. Instead of interest, investors receive the chance to take part in a monthly prize draw. Prizes range from £50 to a million pound jackpot. The total prize fund is determined by the rate of interest.

Index-Linked Savings Certificates

Those wishing to invest for a minimum of 12 months can benefit from tax-free savings in the form of an index-linked savings certificate. This guarantees that money keeps pace with the rate of inflation so that it doesn't lose value in real terms. Income isn't known due to the variable nature of the investment.

Fixed Interest Savings Certificates

These guarantee a specific amount of interest for a defined term. They work in a similar way to a fixed-rate bond, but are a form of tax-free savings. Fixed-interest savings certificates tend to pay a lower rate of interest.

An Individual Savings Account and National Savings investments help to minimise taxes, but some investments do offer a lower rate of interest. Work out the net interest and compare this to the returns offered on tax-free savings. Always utilise personal tax allowances to maximise potential returns.

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