Making the most of your savings
In today’s climate of low interest rates, it can be difficult to secure a good return on your savings and investments. Yet with careful planning, and by utilising tax breaks and allowances, there may be steps you can take to maximise their value.
Tax on savings income
Savings income (which includes all types of interest) paid net is usually taxed at source at 20%. Dividends on UK equities carry a (non-repayable) tax credit of 10%.
Tax paid unnecessarily on bank and building society interest can be reclaimed using form R40, while non-taxpayers can register to receive interest without tax being deducted by completing form R85.
Tax breaks are also available when saving into a pension, subject to certain limits.
Pension contributions made up to the level of earnings (or £3,600 if greater) attract tax relief, but note that pension inputs exceeding the annual allowance (£50,000 for policy years ending in 2013/14) may be subject to a tax charge.
Tax-efficient savings and investments
Paying tax on your savings and investment earnings should be minimised or avoided if possible. There are a number of tax-efficient savings and investments available.
Individual Savings Accounts (ISAs)
Up to £11,520 can be invested in an ISA this tax year, of which up to £5,760 can be invested in cash. 16 and 17-year-olds are able to invest up to £5,760 in a cash ISA. Junior ISAs, for those aged under 18 who do not have a Child Trust Fund account, allow investment of up to £3,720 in 2013/14.
Although income accruing in an ISA does so tax-free, the tax credit on UK dividend income cannot be recovered. All investments held in ISAs are free of CGT.
Withdrawals can be made at any time without loss of tax relief, although some plan managers offer incentives, such as better rates of interest, in return for a commitment to restrictions such as a 90-day notice period for withdrawals. It is worth shopping around online for the best deals, particularly with interest rates for many ISAs currently being relatively low.
Income and capital bonds – Interest is liable to income tax, but paid gross. Income bonds pay interest (variable) monthly. On capital bonds, the interest (guaranteed for five years) is added to the capital annually.
Children’s bonds – These may be bought by anyone over 16 for individuals under 16. Interest is guaranteed for five years at a time until the holder is 21. The bonds are completely tax-free, which is an important feature for parents (normally parents are liable to tax on interest/income over £100 on gifts to their children).
Premium bonds – Instead of paying interest, monthly prize draws are held. Despite a recent cut in the prize fund rate, there is still a tax-free £1 million jackpot and over a million other cash prizes.
Alternative tax-efficient options
Investments under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme and investments in Venture Capital Trusts are, generally, higher-risk. However, tax breaks aimed at encouraging new risk capital may mean that they have a place in your investment strategy.
A number of rules and conditions apply to investments made under these schemes, so please contact us for further information and advice.
Time for a review?
With new rates and deals regularly coming onto the market, it is important to review and assess the performance of your savings and investment strategy.
A regular review will help you to maximise your potential income and keep your tax liability to a legal minimum, whilst helping to ensure that your savings strategy is still on track.
Please contact us to discover how we can help you plan to minimise your tax liability and achieve your personal financial goals.