Although interest rates for savings generally remain low, there are still a few tax-efficient savings opportunities on offer, with increased savings thresholds taking effect from 6 April 2018.
Individual Savings Accounts
Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK, and stocks and shares ISAs are available to UK-resident individuals aged 18 and over. The maximum annual investment limit has been raised to £20,000 from April 2017, which means that a couple can now invest up to a sizeable £40,000 for 2017/18. Interest paid on the investment will be tax-free for both income and capital gains tax.
Junior ISAs operate along similar lines to ‘adult’ ISAs. The maximum investment limit for 2017/18 into Junior ISA accounts is £4,128, so there is scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Since it is also now possible for children to hold both Junior ISA and Child Trust Fund (CTF) accounts, parents are offered increased flexibility to look for higher-yielding products.
It might be worth noting that the Government has stated its intention to make regulations so that the ISA savings of deceased individuals can continue to benefit from income tax and capital gains tax advantages, where those savings are retained in an ISA. Although the start date for this change has yet to be confirmed, it should be borne in mind when thinking about ISA investments.
Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Broadly, up to £200 a month can be saved in the ISA (along with an initial deposit of £1,000) and, provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. The maximum that can be saved in the ISA is £12,000. Taking into account the government bonus, a couple buying together could save up to £30,000 tax-free towards the purchase of their first home. It will take around four and a half years to achieve this level of savings under the scheme.
NS&I Premium Bonds
Although National Savings and Investments (NS&I) Premium Bonds cannot really be called an investment, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month currently stand at 30,000 to one. The number of monthly £100,000 prizes has been reduced from five to two and, for the £50,000 prizes, from 12 to just five. The prize fund rate was 1.25% until April 2017, but is reduced to 1.15% from May 2017. This rate represents the amount a typical saver will receive with average luck over a year – although many will receive far less than this. However, despite the reduction in prizes and odds, with more than £52 billion currently invested, premium bonds remain one of Britain’s favourite ways to save in a tax-efficient way.
Tax on savings income
The Personal Savings Allowance (PSA), which was introduced from 6 April 2016, remains at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, for 2017/18. Running alongside the PSA is the starting rate for savings, which, for 2017/18, remains at 0% on a maximum threshold of £5,000. The 0% band is restricted by non- savings taxable income so that none of the band will be available if that income is above the personal allowance (and blind person’s allowance if claimed) plus the £5,000 starting rate. The two allowances work together and are dependent on total taxable income.
In most cases, the annual personal allowance and PSA will cover any tax liability arising on interest earned. Therefore, when choosing a savings plan, the major consideration is likely to be the interest rate on offer and potential return on the investment, rather than the tax-free status of the account.