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Savings: how to make the most of tax breaks

Putting money aside is always a good idea, but putting your savings out of reach of the taxman will make your money go further.


by Michelle McGagh on Feb 15, 2012 at 12:40

Savings: how to make the most of tax breaks

Putting money aside for a rainy day is a great idea, but are you saving in the most tax-efficient way? Savers can benefit from a number of tax breaks and allowances, so make sure you're making the most of them.

Most people squirrel money away in a bank or building society savings account, but the income – or interest – you receive from your savings is not tax free. The tax you pay depends on the tax bracket you fall into based on your earned income, but most banks take 20%, the basic rate of income tax, from your interest before you get it.

If you are a higher-rate taxpayer, paying 40% tax, you must pay the additional 20% via a self-assessment form.

Depending on the interest you’re earning, savings accounts may not be the best place to put your money, and you should make sure you take advantage of these tax breaks:

Individual savings accounts (ISAs)

ISAs are the best way to save in the UK. You can save cash or invest in stocks and shares through them completely tax-free up to £10,680 for the tax year 2011/12. Note that only half of this amount, £5,340, can be saved in cash: the rest must be stocks and shares. Or you can invest the full amount in stocks and shares.

The allowance will increase to £11,280 from April 2012.

ISAs should be your first port of call for saving because, unlike savings accounts, they do not incur any income tax on the interest on cash and there is no capital gains tax to pay on profits from investments. You will also escape paying any additional tax on dividends paid out by investments above the initial 10%. 

Each person is entitled to one ISA, you must be over 18 to have a stocks and shares ISA or over 16 to have a cash ISA. You cannot have joint ISAs – they must be held in individual names.

Like savings accounts, ISAs offer different rates of interest, and the longer you tie your money in for the better the interest rate will be. If you want to be able to access your money easily then don’t expect a good interest rate.

You can use our ‘No Kickbacks’ savings tool to find the best cash ISA with the highest interest rate. It lists the top rates on the market for a range of different ISA accounts. We do not earn a penny from whichever ISA you go on to choose.

Junior ISAs

Junior ISAs are a tax efficient way to save money for children. The Junior ISA replaced the child trust fund in 2010 and much like the adult ISA, there are cash or stocks and shares options.

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8 comments so far. Why not have your say?


Feb 15, 2012 at 21:25

Why not mention the loopholes available to those who go to tax advisers?

I know two very good ones.

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Jeremy Bosk

Feb 15, 2012 at 22:12

What incentives are there for those too poor to pay any tax?

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Jo Public

Feb 16, 2012 at 07:55

There are no incentives for people too poor to pay tax.

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Some Random Dude

Feb 16, 2012 at 09:58

Franco, may be you should share them !

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Feb 16, 2012 at 10:58

C'mon, Franco - spill the beans!

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David Trigg

Feb 16, 2012 at 15:08

Investment Bond also incur the insurance company's charges.

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kenneth douglas

Feb 16, 2012 at 17:21

Where are these high paying Isa's? Most if not all high street providers are paying very low interest, if you don't remember to renew your Isa, you end up in many cases with 0.001%, also the Isa's I have held for some years have not gained higher interest over the years, on the contrary I would have been better off buying fixed rate bonds. I do not see that much benefit for cash Isa's.

I read many people are losing interest in Isa's and are cashing them in.

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Feb 16, 2012 at 18:40

Banks and Building Societies should be required to make their fixed rate bonds (nearly always the best rates available) available automatically as ISAs with no extra strings. As it is the banks etc are just using the tax free status to boost their own margins. Just like the tobacco companies who hide a boost to their margins on the back of duty increases.

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