Using a savings account with HMRC, such as an Individual Savings Account or ISA.
-free.
All UK adults are eligible for an annual allowance of £20,000, allowing them to invest in an ISA tax-free.
That is to say you do not need to pay tax to Her Majesty's Revenue and Customs (HMRC) on any interest or profit earned in the account.
Utilising an ISA is a fantastic means of saving for a target, for instance saving for a mortgage deposit or your wedding - or even just building up a reserve fund or putting money aside for a summer break - all without having to repay any tax deductions. This leaves you with more money to spend on yourself.
They are like a conventional savings account, albeit with a tax-free envelope, protecting one's cash assets.
“ISAs are a staple for savers as much as ever, as from April 2024 it is possible to register and deposit into multiple ISAs, so long as savers remain within the £20,000 annual limit.”
Interest rates or cashback promotions are often introduced in March and April, towards the end of the tax year, to attract new clients.
You have several options to consider when selecting an Individual Savings Account (ISA).
Cash ISA
It's akin to a savings account. You can select an easy-access ISA that enables withdrawals at any time or there are fixed rates that pay higher returns in exchange for locking your money away for a longer duration. The interest generated on a cash ISA is fixed for a specific period.
Cash ISAs give you the peace of mind that you know exactly what interest rate you'll receive and won't lose your money, but they generally come with lower returns than standard savings accounts and often struggle to match inflation, which essentially means you'll be losing value from your savings over time.
Charlene Young, a pensions and savings expert from AJ Bell, explains: “A cash ISA can only hold cash savings.”
They can be useful for holding money that you might need to access immediately, but they may be susceptible to the impacts of inflation if prices are increasing more rapidly than the interest being earned.
Stocks and shares ISA
You can also put your money to work by investing, and any earnings you make will be free from tax.
A Stocks and Shares ISA allows you to invest some or all of your £20,000 allowance in shares or investment funds. Typically, the returns are greater than those available with cash, and exceed inflation, allowing for an even more efficient and rewarding use of your money, potentially helping you reach your savings targets sooner.
Young says: "A stocks and shares ISA is a financial account that could grow your wealth and safeguard it from rising costs. They are more suitable for longer-term aims, such as investing for school or university costs, to pay off a mortgage, or to increase your retirement fund."
Holly Mackay, founder of investment guidance website BoringMoney, maintains that a stocks and shares ISA is the “no brainer” option for anyone looking to start investing.
She adds: 'We can put anything between £1 and £20,000 into this tax-free account every year, but they are also flexible so you can take the money out if you need it. If you're a bit nervous about investing, you can always start with something like £100 and have a cash ISA as well, and ease your way in.'
“Even the traditionally formal world of finance has not been immune to the impact of technology and it's now simpler than ever to open a stocks and shares ISA online. If you're unsure about what you're doing, look at a 'robo adviser'. They will ask you a few straightforward questions and recommend a pre-selected collection of investments.”
Lifetime ISA
(LISA).
This is a dedicated tax-free saving scheme that can be used to save for a mortgage deposit or for your old age pension. The Lifetime ISA (LISA) pays a 25% government bonus on what you save towards your first home deposit or want to increase your retirement fund.
There are a few rules to be aware of. It is only available to people aged 18-39. You can only put a maximum of £4,000 from your £20,000 annual allowance into this option. What's more, you must be buying your first home, and the maximum value of the property is £450,000.
Young says: "Because of the tax-free benefits, there are extra rules that mean this account won't be suits everyone. You can withdraw the money to buy your first home or once you've turned 60 but if you take the money for any other reason, you'll receive a 25% penalty."
Junior ISA
There is also a separate ISA allowance that you can use to save for your children.
Parents can place up to £9,000 into a cash or stocks and shares Junior ISA account for their children, which can only be accessed from the age of 18.
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You are permitted to make use of your ISA allowance across the various types of ISAs.
Certain savers also receive a personal savings allowance (PSA), which enables basic rate taxpayers to earn £1,000 in interest without being taxed on their savings product, decreasing to £500 for higher-rate taxpayers.
Springall says: “Those savers who have a Personal Savings Area (PSA) to use may feel it’s not worth using an Individual Savings Account (ISA), but recent years have shown their value. As interest rates have increased, so too has the need to shield savings interest from tax.
“Higher-rate taxpayers earning more than £500 in interest will have to pay tax on that amount, so an ISA is an effective way to keep returns safe from tax.”
ISA holders can also transfer their pots from previous tax years into products offering higher interest rates. This is also an option if you wish to boost your stocks and shares ISA account and retain the tax-free benefit.
Some ISAs may even be 'flexible', which means you can add, remove and change new investments during a tax year without hitting your annual limit.
Springall adds: "Not every ISA provider allows this, so savers need to check the terms and conditions very carefully. ISA investors must never withdraw their pots without thinking it through, unless they desperately need the cash, as it will lose its tax-free status."
When investing, your funds are at risk and you may get back less than you invested. Your past performance is no guarantee of future results.
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