Make Your Savings Go Further
Having a savings account or some kind of investment can only be a good thing. It means that you’re thinking about tomorrow and your financial future. However, there are many ways to make your savings go further, and a lot of people miss out by not being in the know about the most suitable products for them. For instance, if you put aside less than £3000 a year into a savings account, did you know that a large quantity of your AER will be sliced off as tax? Are you getting the best interest rate possible? Here’s a quick article that will help small to medium savers make their money go further.
Taxation on Savings
If you’ve got a savings account, you may not know that the interest will normally have tax taken off at 20% before you receive it. If you’re a higher rate taxpayer then you’ll owe tax on the difference. See the Directgov website for the full list of taxes on bank and building society accounts.
How to Avoid Tax
The most common way that savers can avoid paying tax on their hard earned money is to invest in an ISA (Individual Savings Account). These tax free savings accounts were introduced by the government in 1999 to encourage people to save money. You can currently invest up to £7000 per tax year in an ISA, which can be made of cash and stocks and shares elements. This amount is set to rise to £7200 next year.
Aren’t ISAs More Complicated than Savings Accounts?
Because of the different components of an ISA, they are more complicated than normal savings accounts, although you shouldn’t let this put you off. There are currently two types of ISA - a Mini ISA and a Maxi ISA.
Mini ISA
In a Mini ISA you can currently invest up to £3000 a year in cash. You can have a number of different providers, but you can only invest up to £3000 a year in total across all providers. You will see that various providers (generally banks) will give you different rates of interest, so it’s important to take time to select the best rate for you. Once you put money into your ISA you can withdraw it, you will still only be able to put in £3000 for the whole year. That means if you put in £2000 in June, but withdraw £1000 in December, your balance will be only £1000, but you will still only be able to put a further £1000 in. As an alternative, you can invest in a stocks and shares component up to £4000 – a further benefit of this is that you will avoid capital gains tax if you make good profits on your shares. You cannot have both components in a Mini ISA.
Maxi ISA
In a Maxi ISA you have a total subscription limit of £7000, which may be invested as £3000 cash, or £7000 in stocks and shares. Like a Mini ISA, if you withdraw money, the amount of money that you can invest will remain the same. It is also not possible to transfer between different components of your ISA.
In the 2008/2009 financial year it has been proposed that the Mini and Maxi ISA will cease to exist. Instead, in order to simplify the rules, the government has simply changed the total investment allowed to be £3600 in a cash component and £3600 in the stocks and shares component.
If you want to find out more about ISAs, then read the Individual Savings Accounts leaflet offered by HMRC.