How making the most of tax free saving opportunities can help your money to grow.
Adult, child or monkey, if you live in the UK and earn more than £6,475 a year you will have income tax deducted from the interest earned on your savings. This is at a rate of 20% for basic tax payers and 40% for those who pay tax at a higher rate. Obviously this deduction makes a fairly significant difference in the growth potential of your money so it is important to take advantage of all the savings tax breaks possible. We show you how....
ISAs
Each financial year (6th April to 5th April), every UK resident over the age of 16 has an ISA allowance of £10,200 that can be invested as a combination of cash and shares tax free (this increased from £7,500 on 6th April, 2010). Before you even think about saving in a regular account, you should use your ISA allowance to its full potential so that you reap the rewards from tax-free income. For more information on ISAs click here to visit our comprehensive guide.
R85s
If you are currently earning less than the annual tax-free income limit (£6,4755p.a.) it would be well worth your while to fill in an R85 form. This declaration informs your bank that they should not deduct tax from the interest paid on your savings so that your account is credited with the full amount. You can either obtain an R85 form directly from your bank or building society or from the Inland Revenue's website click here). You will need to complete an R85 form for each account you have, but this will be well worth your while financially.
Spousal allowance
Married couples can work the tax system to their advantage where savings are concerned. If one partner has unused tax allowances or pays tax at a lower rather than their husband or wife, its perfectly possible for the higher rate tax payer to transfer their savings into their partners name, reducing the tax deducted and effectively boosting their income. Its only possible to do this with separate accounts and joint savings aren't a compromise as it will be assumed that you each earn half of the interest and tax will be deducted at an equivalent rate. Obviously you have to trust your other half completely to do this but if you are married.....
Save for your children
Children have the same tax allowance as adults, however few earn enough to be taxed on their income. By signing an R85 on behalf of your child you will enable them to receive interest earned on their savings tax free. What's more, so as to set little ones off on the right foot, children's savings accounts often offer much better rates of interest than those available on adult accounts.
However, before you get ideas about transferring all of your savings to benefit from your child's accounts, be careful as there are rules in place to prevent you from doing this. Your children are only able to earn a maximum of £100 interest from money contributed from each parent before tax is deducted. However, this will still add up to a fairly substantial amount and monies gifted by relatives and friends are exempt from this restriction, providing you with a tax-efficient way to save for your child's future. For more information about child savings click here.
Offset your mortgage
If you are a homeowner, its possible to use an offset mortgage to avoid paying tax on your savings. Basically, this involves combining your savings, mortgage and currents account so that while you won't physically earn interest on your savings you will pay less on your mortgage. Potentially helping to cut both the term and amount of interest you pay on your home loan significantly.
