ISAs and other tax-efficient ways to save or invest

Money Advice Service

Make sure you don’t pay more tax than you need to – make the most of tax-free savings and investments for you and your children or grandchildren.

Individual Savings Accounts (ISAs)

If you save with a Cash ISA, set up a reminder for when the introductory rate ends and shop around.

ISAs (sometimes called NISAs) are tax-efficient savings and investment accounts.

You can use them to save cash or invest in stocks and shares.

You can pay your whole allowance of £20,000 into a Stocks and shares ISA, or into a Cash ISA or any combination of these.

You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.

Flexible ISAs

ISA providers now offer a flexible facility which will let you withdraw and replace money from your ISA, provided it is done within the same tax year.

Not all ISAs will let you do this and you should check with your ISA provider that your ISA has this function.

This flexibility is currently not available for Junior ISAs or the Help to Buy ISAs.

Don’t forget ISA transfers are still required to move money from previous years’ ISA subscriptions.

Help To Buy ISA

A Help to Buy ISA was introduced to help first-time buyers save towards the cost of buying their first home.

You can make an initial deposit of £1,000 when you open a Help to Buy ISA and then receive £50 for every £200 saved up to a maximum of £12,000.

The tax break is capped at £3,000.

You also earn tax-free interest on your savings as with a standard ISA. These ISAs are limited to one per person rather than one per house.

You can’t contribute to a Cash ISA in the same tax year.

The Help to Buy: ISA scheme closes on 30 November 2019but you can still claim the Government bonus and save in to a Help to Buy: ISA until 1 December 2030.

Innovative Finance ISA

An innovative finance ISA (IFISA) lets you use your tax free ISA allowance while investing in peer to peer (P2P) lending. They work by lending your money to borrowers and in return you receive interest based on the length of time and the risk of your investment.

Lifetime ISA

The Lifetime ISA is a longer-term tax-free savings account that will let you save up to £4,000 per year and get a government bonus of 25% (up to £1,000). As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within a Lifetime ISA.

It’s designed for first-time buyers between the ages of 18 and 40 to use towards a deposit for their first home or towards future retirement savings once they hit 60 years of age.

You can find more information in A guide to Lifetime ISAs.

Finding the right account

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

We recommend the following websites for comparing savings accounts:

Remember:

  • Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
  • It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
Find out more in our Guide to comparison sites

Junior ISAs

Junior ISAs are a great way to save tax-efficiently for your children.

Family and friends can put up to £4,368 into the account on behalf of the child in the 2019-20 tax year.

There’s no Income Tax or Capital Gains Tax to pay on the interest or investment gains.

Junior ISAs are available to any child under 18 living in the UK who doesn’t qualify for a Child Trust Fund.

Child Trust Fund

The scheme is now closed for new applications.

You can now apply for a Junior ISA instead.

However, if your child was born between 1 September 2002 and 2 January 2011, they’re likely to have qualified for a Child Trust Fund.

These offer tax-efficient savings and a one-off starter payment from the government.

Currently, parents and friends can contribute up to £4,368 each year (2019-20 tax year) into a child’s Child Trust Fund.

Parents can now transfer savings from Child Trust Fund accounts to Junior ISAs.

National Savings and Investments (NS&I)

Your money is totally safe with National Savings and Investments (NS&I) because they’re backed by the government.

NS&I offers a range of savings products some of which are tax free. They include:

  • Cash ISA.
  • Children’s Bonds (Children’s Bonds are no longer available, but if you already have them you have options. Find out more on our Children’s Bonds page).

Tax-free Savings Certificates are not currently available.

Find out more about National Savings & Investments.

Premium Bonds

Premium Bonds are an investment product issued by National Savings and Investment (NS&I).

Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.

Find out about Premium Bonds.

Pension savings

The government encourages you to save for your retirement by giving you Tax relief on pension contributions.

Depending on the type of pension scheme you have, tax relief either reduces your tax bill or increases the amount paid into your scheme.

Where tax relief increases the amount paid in, you get the relief even if you’re a non-taxpayer.

On top of this, your pension fund grows tax-free.

When you retire, you can usually take up to 25% of your pension fund as a tax-free lump sum under current rules.

Your regular pension income is then taxed along with the rest of your income.

Children’s pensions

You can also save for your child’s future retirement tax efficiently with children’s pensions.

You can save up to £2,880 each tax year with the government automatically topping up any contribution by 25%. This 25% is tax relief. This means your contribution automatically becomes £3,600 per year, per child.

When your child turns 18 they become the owner of the pension. They can continue to contribute or leave the savings invested.

When they retire, the child can usually take up to 25% of their pension fund as a tax-free lump sum under current rules.

Their regular pension income is then taxed along with the rest of your income.

Tax-free interest on bank and building society accounts

As of April 2016 you are entitled to a personal savings allowance.

This means you don’t pay tax on the first £1,000 you earn from savings (or the first £500 if you’re a higher rate taxpayer).

Find out more about the Personal Savings Allowance.

If you think you’ve overpaid tax on your savings it’s easy to claim it back from HM Revenue & Customs (HMRC).

Use the links below if you think you shouldn’t be paying tax or have overpaid.

Your Capital Gains Tax exemptions

If you sell a property or investment that has increased a lot in value, you might have to pay tax on the ‘gain’ (profit).

This is called Capital Gains Tax.

If you make a loss when you sell, you might be able to deduct this from other gains so that your total gain is lower.

You don’t have to pay Capital Gains Tax on:

  • investments held in an ISA
  • UK government bonds (also called ‘gilts’), or most corporate bonds
  • personal belongings worth £6,000 or less when you sell them, or
  • any profit you make when you sell your main home (in most cases).

Because you have a separate Capital Gains Tax Annual Exempt Amount for each tax year, if you can carefully time the sale of your investments you could reduce your overall bill.

Find out more about Capital Gains Tax.

Do you need tax advice?

A financial adviser might be able to help you arrange things so that you pay less tax on your savings and investments.

This article is provided by the Money Advice Service.

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