๐Œ๐š๐ค๐ž ๐ญ๐ก๐ž ๐ฆ๐จ๐ฌ๐ญ ๐จ๐Ÿ ๐ฒ๐จ๐ฎ๐ซ ๐ˆ๐’๐€ ๐š๐ฅ๐ฅ๐จ๐ฐ๐š๐ง๐œ๐ž

Rising interest rates mean that individuals may now be paying tax on their savings income which previously they received it tax free. Where this is the case, it is prudent to consider the options available to earn savings income tax free. ISAs feature on this list.

Savings allowance for basic and higher rate taxpayers

Individuals who pay tax at the basic or higher rate are entitled to a savings allowance. For 2024/25, the savings allowance is set at ยฃ1,000 for basic rate taxpayers and at ยฃ500 for higher rate taxpayers.

When interest rates were low, many taxpayers did not need to think about tax-free savings accounts as the savings allowance was sufficient to cover any interest that they earned. With higher interest rates, this may no longer be the case. For example, a higher rate taxpayer with savings of ยฃ20,000 would only receive interest of ยฃ400 a year at an interest rate of 2% which would be covered by their savings allowance of ยฃ500. However, if the taxpayer was now receiving interest of 5% on their savings of ยฃ20,000, the interest would be ยฃ1,000 a year of which only ยฃ500 would be covered by the allowance, leaving the remaining ยฃ500 taxable.

Additional rate taxpayers do not receive a savings allowance.

ISAs

Individual Savings Accounts (ISAs) are tax-free savings accounts. There are four different types of ISAs:

  1. cash ISA;
  2. stocks and shares ISA;
  3. innovative finance ISA; and
  4. lifetime ISA.

Individuals have an annual ISA allowance which they can invest in one or more of the different ISAs.

The limit applies to the amount invested across all four ISAs in the tax year. For 2024/25, the limit is ยฃ20,000. The individual can choose how to allocate this. For example, an individual could invest ยฃ10,000 in a cash ISA and ยฃ10,000 in a stocks and shares ISA in 2024/25. However, investments in a lifetime ISA are capped at ยฃ4,000 a year but this counts towards the annual ยฃ20,000 ISA allowance.

There is no tax to pay on interest on cash in an ISA or income (such as a dividends) or capital gains on investments held within an ISA.

Cash ISA

Banks and building societies offer cash ISAs which, as the name suggests, are accounts that hold cash only. National Savings and Investments also offer cash ISA products. Interest on cash in an ISA is tax-free.

Where interest from savings accounts exceeds the personal savings allowance, consideration could be given to moving some of the cash to an ISA to allow the interest to remain tax-free.

Stocks and shares ISA

Investments in a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds. However, it is not possible to transfer stocks and shares already owned outside an ISA into a stocks and shares ISA with the exception of those awarded under an employee share plan.

Innovative finance ISA

An innovative finance ISA is one that contains peer-to-peer loans rather than cash or stocks and shares.

Lifetime ISA

A Lifetime ISA can only be opened by someone aged 18 and over but under 40. A person can invest up to ยฃ4,000 a year in a Lifetime ISA until they reach the age of 50. The first payment must be made before they reach the age of 40. The Government add a bonus of 25% (capped at ยฃ1,000 a year).

Money can only be withdrawn to buy a first home or on reaching age 60, or if the saver is terminally ill with less than 12 months to live. If withdrawals are made in other circumstances, a withdrawal charge of 25% applies, clawing back the Government bonus.

New UK ISA

At the Spring Budget, the Chancellor announced that the Government would be launching a new UK ISA which would provide savers with the opportunity to earn tax-free savings income while investing in UK companies. The UK ISA will have its own ยฃ5,000 allowance which would be available in addition to the existing ยฃ20,000 ISA allowance.

The Government are consulting on what this may look like.

Financial advice

It is important to take financial advice from a qualified professional before making investments.

 

Partner note: The Individual Savings Account Regulations 1998 (SI 1998/1870).

 

>โ˜‚๏ธFor Helpย with Topic above or any Accountancy help โ€“ contact us:ย Cloud 9 Accounting Teamย 
>โ˜‚๏ธForย Answer on your Question โ€“ย submit your question and we respond asap:ย One Offย  Question
>โ˜‚๏ธFor Leads, Tax articles Copywriting โ€“ย those who do not need accountant but need some leads, tax articles for their website/marketing โ€“ join here and get your unique tax content (copy and paste, ask for sample today):ย Cloud 9 Clubย 
>โ˜‚๏ธFor Self Employedย who donโ€™t have accountant โ€“ get regular advice:ย Cloud 9 Club