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Tax-Free Savings Guide
It was Benjamin Franklin who said ‘in this world nothing can
be said to be certain, except death and taxes’. One half of the
statement is certainly true; and in fairness to Mr Franklin, ISAs
and National Savings and Investments (NS&I) were not around
in the 18th century.
As interest paid on savings is treated
as income by HMRC, it raises the
possibility that tax might have to be
paid on it. But while the Government
takes its share of any savings spoils
with one hand, it also gives a little
back with the other. In this respect, the
tax-free savings vehicles known as
ISAs should be a key component of
most people’s savings arrangements.
They are not, however, the only way
that savers can keep the taxman at
arm’s length. A number of tax-free
savings options are periodically
available from NS&I, the Governmentbacked body popular with savers
because its funds are 100%
guaranteed by the Treasury. At the
same time, anyone contributing to a
pension should not only be applauded
for making provision for their
retirement, but also because it is one
of most tax-efficient ways to save too.
Tax and savings
That tax is payable on savings might
come as a surprise to many. It often
goes unnoticed because savings
income normally has 20% tax taken off
it by banks and building societies
before it is paid. For a basic rate
taxpayer, this means their obligation to
HMRC has been fulfilled. For higher
rate (40%) or additional rate (45%)
taxpayers, the difference is still owed,
with the income having to be declared
on a tax-return, and any extra amount
then paid to HMRC. Similarly, it is
possible that some people will be
eligible for a refund of some or all of
the tax already paid.
Nearly everyone has a personal
allowance, which is an amount of
income that can be received each year
without having to pay tax on it. For the
2015/16 tax year, this amounts to
£10,600. Since April 2015, a new 0%
‘starting rate’ of tax for savings income
has been introduced which applies to
the first £5,000 of savings income. In
effect, it means most people with a
total income of less than £15,600 will
continued overleaf
GUIDES YOU
Key Facts
• Interest paid on savings is
potentially taxable as it is
treated as income by HMRC.
• For anyone whose taxable
income is less than their
personal allowance, interest
can be paid gross.
• Cash ISAs are tax-free savings
accounts available to UK
residents. Anyone over the age
of 16 can open a cash ISA.
• NS&I offers a number of
tax-free savings vehicles,
including Premium Bonds and
Children’s Bonds.
Useful Links
See latest Cash ISA rates
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◄1 Year Fixed
4 Year Fixed
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5 Year Fixed
See latest Children’s
Accounts
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Savers Friend
Related Guides
Cash ISAs
Junior ISAs
Children’s Savings
Full list of Guides
Tax-Free Savings Guide page 1
Tax-Free Savings Guide continued
not pay any tax on their savings. So if
someone’s total income (such as
wages, pension, benefits and savings
income) is less than their personal
allowance, plus £5,000, they will be
able to register for tax-free savings
with their bank or building society.
Interest can be paid gross, without tax
deducted, by completing a Form R85
for each account held, while a Form
R40 allows savers to claim back any
tax that they believe should not have
been paid.
In Budget 2015, it was announced that
from April 2016 a new tax-free
Personal Savings Allowance is to be
introduced. This means that people
will not have to pay tax on the first
£1,000 (£500 for higher rate
taxpayers) of interest earned on
savings. The move will mean that 95%
of people will be able to save
completely tax-free; as a result, from
the same date, banks and building
societies will stop automatically taking
20% in income tax from interest
earned.
ISA appeal
Paying tax on interest will, of course,
lower the payout that a saver receives.
It is essential, therefore, that savers
make the most of the tax-free savings
opportunities that exist. Probably the
best known option is the ISA. Cash
ISAs can be opened by UK residents
aged over 16, while the age rises to 18
for a stocks and shares ISA. Any
returns and capital growth are free
from income tax and capital gains tax,
other than a 10% tax credit on the
dividends on stocks and shares.
The generosity of the tax benefits
means that a limit is imposed on the
amount that can be saved in an ISA
each tax year. For the 2015/16 tax
year, the annual ISA investment
allowance is now £15,240, all of which
can be invested into either cash,
stocks and shares, or a combination of
both.
Importantly, ISAs can be transferred to
secure better returns, although the
move must be made directly between
providers. Our guides on Cash ISAs
Last revised: 6th April 2015
and Junior ISAs, into which parents
can save for their children tax-free,
explore these options in greater depth.
NS&I
For savers who have used their ISA
allowance, or who simply want
alternative ways to save tax-free,
NS&I is worth a look. As well as
offering an ISA, the state-backed
provider also has Premium Bonds on
its roster of products.
Importantly, however, rather than pay
interest, each bond number is entered
into a monthly prize draw. Two £1
million top prizes are on offer, together
with smaller rewards ranging from
£100,000 to £25, all of which are paid
tax-free. Although Premium Bonds can
be cashed in any time penalty-free, it
should be remembered that the prizewinning element means there is no
guarantee of a positive return.
“The generosity of the tax
benefits means that a limit
is imposed on the amount
that can be saved in an
ISA each tax year.”
Also from NS&I, Children’s Bonds
provide tax-free interest for children
under the age of 16. Up to £3,000 can
be invested per child per issue, with
each bond running for a term of five
years. On the fifth anniversary, the
bond can be renewed, although final
maturity must be on its first five-year
anniversary on or after the child’s 16th
birthday.
Although withdrawals can be made
from the bonds early, a penalty
equivalent to 90 days’ interest is
deducted from the amount cashed in.
If the child is 16 or over on the
maturity date, they will be contacted
directly by NS&I as they will then be
responsible for the bond.
While not currently on sale, there will
be people already holding NS&I
Savings Certificates which could soon
mature. The certificates come in two
guises – fixed interest and indexlinked – with the former paying a fixed
rate of interest throughout the term,
and the latter a fixed rate of interest
above Retail Prices Index inflation.
The promise to pay an inflationbeating rate tax-free meant the indexlinked certificates, in particular, proved
hugely popular when they were on
sale. However, under rules designed
to prevent NS&I dominating the
savings market, the provider is only
permitted to take in a certain amount
of money each year. As a result, the
last issue of certificates was withdrawn
in September 2011, with no indication
as to whether or when a new issue
can be expected.
For those who already hold a
certificate which is about to mature,
however, there is the option to roll over
into a new certificate. Even though
inflation is currently low, at the minute
the certificates are the only way to
guarantee savings will stay ahead of
inflation tax-free.
Further alternatives
A less well known tax-free alternative
available from Friendly Societies is the
Tax Exempt Savings Plan (TESP).
TESPs are stock market based
investments that must be held for a
period of at least ten years.
Up to £25 a month can be put into a
plan to eventually provide a tax-free
lump sum, though it should be
remembered that stock market
exposure means there is no guarantee
that money will not be lost.
Looking longer term, contributing to a
pension is one of the most tax-efficient
ways to save. Tax relief is paid on
contributions, which means that for
every £80 paid in, a further £20 is
added to the pension fund by the
Government. Pension funds also
generally grow free of income tax and
capital gains tax.
See latest Cash ISA rates
Easy Access
Notice Variable
2 Year Fixed
3 Year Fixed
◄1 Year Fixed
4 Year Fixed
1 Year Fixed
5 Year Fixed
Tax-Free Savings Guide page 2