Choosing the right savings account
With the UK savings market full of competition and offering a variety of different options, it can be a difficult task to decide on the best savings accounts is best for you.
You may be unaware, but the amount of money you earn affects how much of the interest you can keep from savings accounts.. This is because interest is seen as income, so your income tax rate will be applied to any earnings you make in interest or returns on investments.
You can currently earn up to Ј7,475 tax free, but anything over this amount is subject to income tax and the rate of tax you pay is worked out depending on the size of your salary.
There are currently 3 main tax brackets that kick in after the tax free allowance – 20% on all earnings earn up to Ј35,000, 40% on anything between Ј35K-Ј150K and a massive 50% on anything over Ј150,000.
As savers must pay income tax on interest earned from all standard savings accounts, they could be losing up to half of all returns to the tax man.
This is where the Individual Savings Account (ISA) comes in. ISAs should be your first port of call when looking to save. This is because these clever accounts are unlike any other type of savings account, allowing us to shield any income made in interest from the tax man, so we can take home 100% of our earnings.
Another great advantage of ISAs is that as well as investing cash, you can also use stocks and shares ISAs to purchase on the stock market and avoid paying taxes on your returns.
Cash ISAs are available to anyone in the UK over the age of 16 (with a junior ISA option available for children), and investment ISAs can be opened by those aged 18 and over.
All UK savers have an ISA allowance of Ј10,680 which is renewed at the beginning of each tax year. Up to half of this allowance can be used for a cash ISA (with the option of using the rest in an investment ISA), or up to the full amount in stocks and shares ISAs.
The idea is that over the years, savers can build up a tax free haven that produces tax free returns. This can allow you to avoid paying substantial amounts of tax, so they shouldn’t be overlooked.
Fixed Rate Bonds
If you already have a nice sized savings pot and you’ve already used up this years ISA, you should consider fixed rate bonds.
These accounts generally offer higher rates of interest than standard savings accounts in exchange for your access to the funds being reduced.
While your money is safe, you will be taking a small gamble with the interest you can earn, as fixing the rate and term means that the rates will never fluctuate, so if interest rate increase across the board increased due to competition or a rise to the Bank of England’s base rate, you will not see the benefits.
However, this can also work the other way, as if rates begin to fall, you will enjoy the rate that you locked in at for the remainder of the term.
With all savings accounts, it is important to remember that most of the higher paying products come with introductory bonus rates that fall after 12 months. If this is the case, make sure you set yourself a reminder to move across to a different provider after a year.
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