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Making the right savings and investment choices for you and your family is a big decision. Circumstances can also change which is why it’s so important to review your financial situation on a regular basis to ensure you are on target to achieving your financial goals.
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The allowances each tax year run from 6 April to 5 April the following year and might include:-
- Your Personal Allowance of £12,570. This is the amount of income you can earn tax-free. This amount may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.
- The starting rate for savings may allow you to get up to £5,000 of interest without paying tax if your other income from your wages or pension is less than £17,570.
- Your Personal Savings Allowance. This is separate from any ISA allowance you may have. The amount of allowance you have depends on the type of taxpayer you are. If you’re a UK basic-rate taxpayer, up to £1,000 of interest on your savings income is tax-free. And if you’re a higher rate taxpayer, up to £500 is tax-free. Additional rate tax payers earning over £125,140 a year don’t get the personal savings allowance.
The interest rates promoted for savings accounts are usually the gross rate of interest they’ll apply to your savings. The gross rate of interest is what they’ll earn before any tax has been taken.
What you need to do
You don't need to do anything to get the tax-free interest you’ve earned under your Personal Savings Allowance, it happens automatically.
If the interest you earn is more than your allowance, you may have to pay any tax due. HMRC will normally collect tax by changing your tax code or through your self-assessment.
If you’re a tax payer or not there are savings plans that allow you to earn interest without having to pay any tax at all. This guide tells you about some tax free savings options that are available.
Questions to ask yourself
When you’re considering the best way to save your money, there are three key questions you need to ask yourself.
- How much can I afford to save?
- How long do I want to tie my money up for?
- How much risk am I prepared to accept?
In general, the longer you tie your money up for or the more you are prepared to accept the risk that the value of your investment may go down as well as up, the higher the potential return.
1. How much can I afford to save?
To help you work out how much money you could save, try the handy tools and calculators at MoneyHelper.
It’s important to be realistic or you might struggle to keep it going. It’s far better to save a lower amount that you can stick to than try to save a higher amount and give up because it puts too much strain on your lifestyle. Remember, saving shouldn’t be a chore!
Or it may be that you have a single lump sum of money to invest, for example from an inheritance, a bonus from work or, if you’re really lucky, a Lottery win! You can often get higher rates of interest for investing larger sums of money.
2. How long do I want to tie my money up for?
One thing we can be sure of in life is that the unexpected happens. And, for this reason, it’s a good idea to keep a sum of money in an easy access savings account that you can get at straight away, without any penalty. Think about your lifestyle and what could happen that you may need money for instantly, for example for car or house repairs, and keep this amount easily accessible. After that, you can start thinking about putting your money away for longer, which will normally give you a higher return.
Saving tips
Debt busters
Before you start building up your savings or investments, you should seriously consider using some of your disposable income to reduce, or pay off, any credit card or other short term debt that you may have. If you don’t, the high interest rates charged on this type of debt could wipe out the money you earn on your savings.
Get the regular savings and investment habit the easy way
If you want to save a regular amount, set up a standing order with your bank. This way, you don’t need to remember to put money into your savings account every month and there’s less temptation to spend it instead!
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3. How much risk am I prepared to accept?
Whatever you decide to do with your money, you need to consider the level of risk you are comfortable with. In deciding this, you should consider a number of things, including what you’re saving for, the length of time you are prepared to wait for your money to grow, whether you are prepared to risk losing money and any other savings and investments you may have.
Remember to consider all the options and think carefully about talking to your financial adviser to ensure the decisions you make suit your circumstances.
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| Type of investment | Minimum term | Who offers them? | Type of risk | |
|---|---|---|---|---|
| Instant access account | Cash | None | Banks and building societies | Low risk, low return |
| Notice account | Cash | Typically 30 days or more | Banks, building societies, Post Office | Low risk, higher return, normally need a minimum investment of £1,000 + |
| Bonus account | Cash | None | Banks, building societies, Post Office | Low risk |
| Cash ISA | Cash | None | Banks, building societies, insurance companies | Low risk, tax-free |
| Stocks and shares ISA | Stocks and shares | None, but usually taken out for 5 to 10 years | Banks, building societies, insurance companies | Tax-free, more risky than a cash ISA, but with higher potential returns |
| National savings | Cash and stocks and shares | Varies according to product chosen | UK Government | Visit NS&I for information on the risk involved |
| Fixed rate bonds | Cash | Usually 1 to 5 years | Banks and building societies | Low risk |
| Gilts | Fixed interest | Short, medium, long term and undated (no set maturity date) | UK and foreign governments | Risk varies depending on the chance of the government not repaying the loan |
| Corporate bonds | Fixed interest | Short, medium, long term and undated (no set maturity date) | UK and foreign companies | Risk varies depending on the chance of the firm not repaying the loan |
| Buy-to-let | Property | None, but property is usually a longer term investment | Estate agents and solicitors (in Scotland) | More risky than cash or fixed interest. Legislative change continues to see the loss of tax breaks |
Saving tips
Shop around
Interest rates vary between different account providers, so it’s worth shopping around to make sure you get the best deal for your savings. Why not try using a price comparison website? You can also check out the money sections in the weekend papers for some useful advice.
Divide and conquer
Your current account with your bank is a kind of deposit account, but don’t mix your savings with your monthly living costs - it’s far too easy to lose track when it’s all in the same account. Your savings might disappear before you realise! Keep your savings separate.
Other things to consider
Case studies
Bob and Janet
A long term gain
A few years ago, Bob and Janet took out a 10 year savings bond. They both had good jobs, so they could afford to put some money away for their future. Unfortunately, Bob was made redundant so the couple had to look around to see where they could make some savings. Their first thoughts were to stop paying the premiums into the savings bond but before they made any decisions, they spoke to an independent financial adviser that Phoenix Customer Care had put them in touch with.
She told them that they could cash in the bond before the 10 year investment period had ended, but they might not get back all the money they’d already paid in. She told them that they would also lose the valuable life cover offered by the bond, that would pay out if either of them were to die. Their financial adviser also made Bob and Janet aware of the option of making the policy "paid up" but again, this might have meant that they would not have received the amount that they had planned for from this policy. Bob and Janet took her advice and made savings elsewhere, such as by changing their utility providers and looking for better credit card rates.
The financial adviser was right – not long afterwards, Bob got a new job and the investment bond matured into a very welcome lump sum. Bob and Janet used some of the lump sum to help put their son through university and the rest to pay for a well-earned holiday.
Debbie and Elaine
Saving for life
Debbie and Elaine had just bought their first home and were looking to start a family. They realised that having children can be an expensive business so they decided to build up a nest egg before the patter of tiny feet arrived.
Both of them had already bought an Individual Savings Account (ISA) to make the most of their tax free allowances and they’d shopped around to get the best deals on their utility bills, phone bills and insurance premiums.
This gave them a little extra money every month which they decided to put into a separate savings account. Looking at comparison websites, they went for an easy access account which offered a bonus. The account let them take money out up to four times a year without incurring a penalty and gave them a guaranteed reward after five years if they stuck to their withdrawal limit.
The account was the ideal choice as they would get a bonus for keeping their money invested for a longer time, but they could also take their money out without penalty if they needed it sooner than expected.
Bob and Janet
A long term gain
A few years ago, Bob and Janet took out a 10 year savings bond. They both had good jobs, so they could afford to put some money away for their future. Unfortunately, Bob was made redundant so the couple had to look around to see where they could make some savings. Their first thoughts were to stop paying the premiums into the savings bond but before they made any decisions, they spoke to an independent financial adviser that Phoenix Customer Care had put them in touch with.
She told them that they could cash in the bond before the 10 year investment period had ended, but they might not get back all the money they’d already paid in. She told them that they would also lose the valuable life cover offered by the bond, that would pay out if either of them were to die. Their financial adviser also made Bob and Janet aware of the option of making the policy "paid up" but again, this might have meant that they would not have received the amount that they had planned for from this policy. Bob and Janet took her advice and made savings elsewhere, such as by changing their utility providers and looking for better credit card rates.
The financial adviser was right – not long afterwards, Bob got a new job and the investment bond matured into a very welcome lump sum. Bob and Janet used some of the lump sum to help put their son through university and the rest to pay for a well-earned holiday.
Debbie and Elaine
Saving for life
Debbie and Elaine had just bought their first home and were looking to start a family. They realised that having children can be an expensive business so they decided to build up a nest egg before the patter of tiny feet arrived.
Both of them had already bought an Individual Savings Account (ISA) to make the most of their tax free allowances and they’d shopped around to get the best deals on their utility bills, phone bills and insurance premiums.
This gave them a little extra money every month which they decided to put into a separate savings account. Looking at comparison websites, they went for an easy access account which offered a bonus. The account let them take money out up to four times a year without incurring a penalty and gave them a guaranteed reward after five years if they stuck to their withdrawal limit.
The account was the ideal choice as they would get a bonus for keeping their money invested for a longer time, but they could also take their money out without penalty if they needed it sooner than expected.