Tax-Free Saving

Believe it or not there are some places you can put your money where the tax man can't reach it. These include some National Savings & Investments (NS&I) saving products and PEP's, TESSA's and ISA's.

National Savings & Investments
Some of NS&I’s products are tax-free. This means you do not have to pay Income Tax or Capital Gains Tax on any interest or prizes you receive from some NS&I savings products.

Currently, these are:

Premium Bonds
Fixed Interest Saving Certificates
Index linked Saving Certificates 
Children’s Bonus Bonds

It's worth noting however that when setting interest rates on tax-free products, NS&I will take into account the amount of tax the Exchequer would have received if the product had been taxable.  Click here to visit the NS&I website for more information
 

Premium Bonds
 

Premium Bonds are an investment where, instead of interest payments, investors have the chance to win tax-free prizes. When someone invests in Premium Bonds they are allocated a series of numbers, one for each £1 invested.  The minimum purchase is £100 (or £50 when you buy by monthly standing order), which provides 100 Bond numbers and, therefore, 100 chances of winning a prize. You can hold up to £30,000.

Any prize you receive is free of UK Income Tax and Capital Gains Tax and you do not need to declare it on your tax return.

Your money does not grow, if you bought 100 x £1 premium bonds in 1970 and you cash them in 2008 you get your initial purchase of £100 without any inflationary growth.  Click here for more information on Premium Bonds
 

Fixed Interest Saving Certificates
 

Fixed Interest Savings Certificates are lump sum investments that earn guaranteed rates of interest over set periods of time, called 'terms'. They're free of UK Income Tax and Capital Gains Tax, whatever rate you normally pay. You don't even need to declare the interest on your tax return.

The HM Treasury NS&I offer Savings Certificates in a choice of two terms, currently 2 years and 5 years. You can choose which term suits you best. Or you can invest in both.

Each term is sold in Issues. A new Issue is introduced whenever the fixed interest rates offered change. This doesn't affect the interest rates on any Savings Certificates you already have - they remain guaranteed. But it does mean you can also invest in the new Issue at the new rates, allowing you to save even more tax-free.

You can invest any amount from £100 to £15,000 in each Issue of Fixed Interest Savings Certificates. The more you invest, the more tax-free interest you will earn. And this doesn't count towards your allowance for our Index-linked Savings Certificates or cash mini ISA.

Because all the returns are yours to keep, the equivalent gross return is higher. To match a tax-free return of, say, 4% a year, a basic rate taxpayer would need to earn 5% before tax. And the same tax-free return would be worth 6.67% if you pay tax at the higher rate (based on current tax rates). So you can see the advantages of investing tax-free. Take note that when setting interest rates on tax-free products, NS&I will take into account the amount of tax the Exchequer would have received if the product had been taxable so interest rates will be lower and in the end may not be so competitive - take professional advice. Click here to read more about fixed interest saving certificates
 

Index Linked saving Certificates

The HM Treasury NS&I offer inflation-beating savings, where the value of your investment increases in line with inflation as measured by the Retail Prices Index (RPI) and earns guaranteed interest rates on top - with all your returns tax-free (which means that all returns are free of UK Income Tax and Capital Gains Tax). So you can be sure to keep ahead of rising prices.

Because inflation fluctuates, you won’t know exactly how much you are going to receive until your Certificates mature. But you can be sure that your money will have more spending power.

You can invest from as little as £100 up to £15,000 in each Issue of each term. Unlike ISAs, Index-Linked Savings Certificates aren’t tied to the tax year. You can invest up to another £15,000 tax-free whenever a new Issue goes on sale – they normally release several new Issues a year

Index-linked Savings Certificates are lump sum investments designed to be held for a set time called a “term”. Currently you can choose either a 3-year or a 5-year term. Or you can invest in both.

The rates of interest you’ll earn on top of inflation are fixed and guaranteed for the whole term. These fixed rates increase each year, so you’ll get the best return for your money if you keep your Certificates for the full term.  Click here to find out more about index linked saving certificates 

Children's Bonus Bonds
 

With Children's Bonus Bonds from National Savings and Investments you can invest tax-free for your child's future in their own name. All returns on Children's Bonus Bonds are completely tax-free for both child and parent.

You simply invest a lump sum and interest will be added each year, along with a bonus every five years until the child’s 21st birthday, all tax-free. And you can invest in as many issues as you like, up to £3,000 per issue for each child.

Normally if a parent gives their child money to invest, the parent is liable to tax on the interest if it comes to over £100 in any tax year, even if the child isn’t a taxpayer. But with Children’s Bonus Bonds the interest and bonuses are all completely free of UK Income Tax and Capital Gains Tax. Even if the child starts work and becomes a taxpayer before cashing in their Bonds, they still won’t have to pay tax on the interest.  Click here to read more about Children's Bonus Bonds
 

PEP's and TESSA's
 

In the beginning, there were Personal Equity Plans – PEPs.  Then another tax-free savings vehicle was introduced, the Tax-Exempt Special Savings Account (TESSA). These were designed as a balance to the equity-orientated nature of PEP investments, by providing for the investment of cash into TESSA-designated deposit or share accounts, generally operated by banks or building societies.

PEPs and TESSAs did not survive the change of government in 1997, but the popularity of these tax-efficient investments had been well established by this point, with the result that quite quickly upon assuming office Gordon Brown announced a replacement for both along similar lines. And so the ISA was born. The idea was to build on the positive aspects of PEPs and TESSAs, but to broaden their scope and encourage a wider range of people to make long-term savings.
 

 
ISA's (Individual Savings Accounts)

Individual Savings Accounts (ISAs) are tax-free Savings accounts which means individuals do not have to declare any income or capital gains they receive to the Taxman. Individuals can save up to £7,000 each financial year.

There are two types of ISAs - Maxi ISA and Mini ISA. An individual can only subscribe/contribute to either one Maxi ISA or up to two Mini ISAs (one for each component), each tax year. Money cannot be invested in both a Mini and Maxi ISA in the same financial year. There are two components to ISA saving: a cash ISA, basically a savings account, or into an ISA fund, that will invest your money into shares, property or bonds, depending on the type of fund.

Care is needed as you cannot mix minis and maxis. If you start a mini ISA, even with just £1, then you cannot have a maxi ISA. You can have two minis (one cash, one stocks and shares) but just one maxi.

Maxi ISA
With a maxi ISA you can invest the full £7,000 with just one provider. This can be just a stocks and shares ISA or, if the provider offers a cash option, then you can have up to £3,000 in cash within the maxi ISA. 

Mini ISA
You can have two mini ISAs in any one tax year and each mini can be from a different provider. This is so you can have one stocks and shares ISA (up to £4,000) and one cash ISA (up to £3,000).

Individuals can only invest in one component of a Mini ISA each financial year. Unlike the Maxi ISA, the amount you can invest is fixed for each component. For the risk averse or for those only wanting a Cash ISA from a building society or bank this will be the favoured option. Another advantage of a Mini ISA is that it provides greater flexibility allowing individuals to invest in a Cash ISA with, say, a building society and a Mini Stocks and Shares ISA with a company that specialises in equities.

Cash ISA
Like regular savings accounts, some providers offer different types of Cash ISAs. Some providers will offer instant access to money with no penalty or loss of interest. Some other providers have restrictions, such as a fixed term or require notice to be given before money can be withdrawn. If a withdrawal is made within a fixed period then a penalty or loss of interest may result.  Shop around to get the best deal.

ISA Fund
This component allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. This type of ISA is good if individuals are able to leave their money alone for a long period of time, usually over five years, and are comfortable taking on the risk of market fluctuations in the value of their investment.

Stakeholder ISAs: New stakeholder products have now become available. To earn the name 'stakeholder' the products have to meet conditions designed to ensure that the products are straightforward and good value.

Independent financial advisers can help pick these, but you will pay higher charges on funds in return for this advice. Some experts argue that novice investors should begin with index trackers, low-cost funds that mirror the stock market, or global investment trusts 
 
 

Click here to find out more about ISA's
  
Useful Links

The National Savings and Investments website is a great place to start your tax free savings, Click here to visit the NS&I website for more information

Shop around for the most competitive deals, www.moneysupermarket.com is a great place to start.