Without the benefit of a crystal ball, nobody knows what’s around the corner. That great job with a healthy salary could end next year. You might be diagnosed with a critical illness and be unable to work. Your expensive car could be stolen, or out of the blue you discover you’re expecting twins. The point I am making here is that unexpected events play havoc with our personal finances. Sure, a credit card can keep you going for a couple of months or so, but without a decent pot of savings to cushion you, things will go badly wrong, fast.
Savings are essential, but if you are not careful you will end up paying tax on any money you stash away in a savings account. Interest earned on savings must be declared for tax purposes. For the majority of people, interest earned will be negligible because interest rates are so low right now, but if you have a more significant sum of money in a savings account, it is sensible to look for a tax-free savings vehicle. So what are your options?
Help to Buy ISA
Are you a first time buyer? If so, the government’s new Help to Buy ISA is a great place to build a tax-free savings pot. The government adds a whopping 25% on any money you save. The only catch is that you have to use this money towards a mortgage deposit.
Fixed Rate Cash ISA
A Fixed Rate Cash ISA is a tax-free savings account. You can save up to £15,240 without paying tax on any interest you earn. You are free to withdraw some or all of the money at any time, but you will lose interest on the money withdrawn.
Easy Access Cash ISA
An Easy Access Cash ISA is less restrictive than a Fixed Rate Cash ISA, but they tend to pay lower rates of interest. For this reason, look for the best ISA rates before you open an account.
The new Lifetime ISA is due to be introduced in April 2017, which is designed to encourage people to save for a first home or retirement, depending on your priorities. You can save up to £4,000 per year and enjoy a 25% bonus (up to £1,000) on your savings. The catch is that only people aged between 18 and 40 are eligible to open a Lifetime ISA.
Stocks and Shares ISA
A Stocks and Shares ISA is still tax-free, but it lets you choose where your savings are invested.
Innovative Finance ISA
There is a new type of ISA for people who earn income from P2P lending sites like Zopa. Opening an Innovative Finance ISA allows you to shield any income you earn from P2P lending from the Tax Man.
If you want to open a tax-free savings account for a child under the age of 18, look at a Junior ISA.
One last point worth making is that if you are on a low income (£17k per annum, including any savings interest), you can save up to £5,000 tax-free.