Understanding Taxation on Savings Interest
If you are a UK taxpayer you will have to pay tax on the money (interest) your savings earn; if you are a savings rate taxpayer you will pay 10%; a basic rate taxpayer will pay 20%; a higher rate tax-payer will pay 40% and an additional rate tax payer will pay 50%.
How ISAs Provide Tax-Free Saving Options
However, savings and investment plans exist which aim to allow one to save a certain amount of money each year where the income earned from them is tax-free. These plans are called ISAs (individual savings accounts) and are a holding facility for a whole range of savings and investments.
Whether you are saving for a specific purpose or are looking to protect your finances securely, opening up a cash ISA could be the best option for you as, although the interest rates offered are not necessarily the most competitive, ISAs allow for an individual to earn interest on their money without being subjected to income and capital gains tax (the tax the government charges on some profits you make from savings and investments). If you make profits of more than a set amount from the sale of shares and certain other assets in a tax year you would normally have to pay CGT.
ISA Contribution Limits and Allowances
By its very nature an ISA must have a maximum annual deposit and withdrawal limit; for the 2013/2014 tax year an adult in the United Kingdom can deposit up to £11,520 in stocks and shares isas or £5,760 in cash tax-free. Once an individual’s full allowance has been reached the ISA cannot have any more funds added to it.
Choosing the right ISA could guarantee a return on your savings, earn you the most interest and, perhaps most importantly, grant you the peace-of-mind that your savings are safe and protected whilst saving.
Benefits of Long-term ISA Holding
Any funds that are put into an ISA will remain tax-free indefinitely, and this is a benefit that could well outweigh any other investment option with your money. Whether you are putting away a considerable amount of money into savings or are looking to reserve a nominal fee you are guaranteed to be protecting your assets by putting it in an ISA that will ensure that it is constantly protected from any kind of tax unless you decide to make a withdrawal.
Furthermore, it is always worth bearing in mind that, although ISAs will most likely not always be boasting the most prominent, market leading savings rates, by reaching your allowance each tax year you are ensuring that another £5,760 of your money is getting an admirable return on the investment and is, more importantly, remaining tax-free which must always be viewed as a positive when trying to maintain or even increase savings.
Cash ISA Versus Stocks and Shares ISA
It is worth noting that, although there is the option of a stocks and shares ISA over a cash ISA, stock markets peak and trough so it is often necessary to invest using a long-term plan in order to ‘ride out’ some of these bumps; therefore, if you will need access to your funds at short notice then a cash ISA would be preferable to a stocks and shares ISA. Furthermore, if you are in a position where you cannot afford the potential failure of this venture then it could be worth contemplating an alternative as, if you currently have short-term needs (e.g. you are saving for a wedding or property deposit) then you will not be able to afford a drop in the value of your investment that could occur with a stocks and shares ISA so once again it would be preferable to utilise a cash ISA.
In conclusion, you may decide to save in an ISA due to the obvious tax benefits as well as the added benefit of gross-interest that can make the return on your savings even greater than the net you would receive from a savings account where tax is placed on interest.
