Savings Accounts – Get Wise To Tax Issues
So, you’ve made your budget, planned a basic framework for your future, and worked out how much you want to save. After doing all that hard work, you want to make sure that you are not paying more tax than you need to on your money – the interest on your savings will be taxed unless you manage your money cleverly! By taking advantage of allowances and possibly investing abroad, you can minimise the amount you are paying.
Becoming Tax Efficient
While tax is an area that most people would rather ignore, there are a few things it’s definitely worth your while to know about. When it comes to savings, there are several ways to make sure you are tax-efficient – making use of your tax-free savings allowance is one way, claiming a Child Trust Fund for each of your children is another. Those who are willing to do more work to avoid (not evade!) taxes may choose to invest their money in accounts or investments overseas. I would like to point out something which an accountant friend of mine told me some time ago which is there is no law against tax avoidance, but there is a law against tax evasion. This should be considered when you are planning your finances, where your money is and how you use it.
Taxes for Banks
Basically, banks and building societies are obliged to pay 20% tax on the interest earned on your accounts. How much you pay, though, depends on two things: Your age, and your earnings. Payments into a pension are not eligible for tax, and experts strongly recommend you take advantage of this. Effectively, the government pays 22% of your pension contribution.
Government Issues
The government is transparent about how to make the most of your savings allowances – visit www.directgov.uk/MoneyTaxandBenefits to find out more. The best-known method is by investing in ISAs – Individual Savings Accounts. (These were brought out by the government in 1999 to replace TESSAs and PEPs.)
You may also want to consider National Savings and Investments, which offer a range of products such as Premium Bonds, Index-Linked Savings Certificates and Fixed Interest Savings Certificates. One major benefit of investing with NSaI is that, as a government scheme, your money is protected by guarantee. Premium Bonds don’t pay interest, but your money is entirely safe, and every month your numbers are entered into prize draws. Any winnings are tax-free.
More Savings and Tax Information
Some things you will want to consider are how easily you need to access your money – generally speaking accounts that require one to three months notice to make a withdrawal will pay higher interest than instant access accounts. The site www.nsandi.com has full details of all schemes offered, plus a guide and calculator to help work out what investment would be best for you.
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