- Get a grip on your finances – work out how much you have in savings, what rate of interest you’re receiving, and whether you’re taking advantage of your tax-free subscription. If you don’t have any savings look at your budget to see if you could free up a monthly amount to start saving.
- Remember ‘Tax-free’ means free from UK Income Tax and Capital Gains Tax
- Start small, don’t just open online current accounts, open a Cash ISA – in a recent first direct survey* nearly 50% said they didn’t have any tax-free savings. You don’t have to use your limit, but you might as well avoid paying tax on any savings you do have up to the Cash ISA limit.
- Use your limit if you can – In 2012/2013 the total ISA limit is £11,280 of which £5,640 can be put in a Cash ISA and anything you don’t put in your Cash ISA can go towards your Stocks and Shares ISA instead. Make sure you use your 2012/2013 tax year limit before the start of the new tax year on 6 April 2013 because, after this date, this tax year’s subscription allowance will be gone for good.
- Don’t forget a Stocks and Shares ISA – recent research* by first direct found that only 14% of the population have a Stocks and Shares ISA, essentially missing out on between £5,640 and £11,280 of tax-efficient allowance (2012/2013). The benefit of a Stocks and Shares ISA is that all investors, including higher rate taxpayers, won’t pay Income Tax. By investing in an ISA you are also protected from paying any Capital Gains Tax on any increases in the value of your investment.
- Budget for a higher allowance in 2013/2014 – the tax-free allowance is going up to £11,520 (£5,760 for Cash ISAs in 2013/2014, so if you put a little aside every month consider increasing the amount so you can use your higher subscription allowance.
- Transfer your ISA to get a better rate – the survey* also highlighted that 62% have never transferred their ISA. It’s important to get the most from your tax-efficient savings and whilst you can only have one Cash ISA and one Stocks and Shares ISA per tax year you can transfer your ISA balances to another provider at any time.
- Keep all your eggs in one basket – every tax year you have a maximum Cash ISA subscription and you are allowed to transfer the previous tax year balance into your new Cash ISA. If you can manage to fill your subscription each year the balance will soon add up allowing you access to the better Cash ISA rates e.g. first direct’s market-leading 3% cash ISA rate (available for balances over £40,000 – just 7 years of cash-free savings).
- Consider a UK Offset Mortgage – if you have a mortgage and savings then an offset mortgage might be a good option. Any savings you have are offset against the balance of the mortgage and because they don’t receive credit interest they’re not subject to tax. For instance, if you have a mortgage of £100,000, savings of £20,000, and the 1st Account with a credit balance of £1,000, you only pay interest on £79,000. And as you don’t actually earn interest on your savings, there’s no tax to pay on them.
* Research carried out on behalf of first direct by Opinion Matters in February 2013 amongst 2,034 people aged 16+