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Tax Efficient Savings

By: J.A.J Aaronson - Updated: 24 Mar 2014 | comments*Discuss
 
Tax Savings Isa Tessa Pep Bonds National

There are a number of viable options for people who are looking to cut their tax bill. Many of these relate to expenses such as the cost of training (which is tax-free) and mileage (for which allowances are made – see our article Claiming Tax Relief on Mileage in this section). Similarly, other schemes, such as Trust Funds, rely on the individual having a certain amount of capital available in the first instance to invest. However, there are a number of tax-free savings accounts available that buck this trend.

ISAs

In April 1999, the government introduced the Individual Savings Account (ISA). These have grown to be extraordinarily popular as a result of their tax-free status and their relative ease of use. Their characteristics and limitations are outlined in more detail elsewhere on this site, but the crux of the scheme is that investors can save up to either £11,520 in a variety of different forms (cash, stocks etc) entirely tax-free. This threshold will now rise annually with inflation.

ISAs are available at virtually every high-street bank, and the 'instant-access' nature of the cash ISA has made it a popular choice amongst casual savers who are still tax conscious. The ISA was designed to replace the TESSA and the PEP, which had been seen to be both difficult to understand and unfairly slanted against those with less money to save, and as a result the minimum investment in an ISA is only £1.

NS&I

There are a number of other tax-efficient savings schemes available, many of which are available from National Savings & Investments (NS&I). This is a financial organisation which offers products secured by the Treasury, thus giving the investor the promise of unparalleled safety for their money. One of NS&I's most popular savings vehicle is the Premium Bond, which involves savers buying a series of bonds which are then entered into a draw each month. If a bond that you own is picked in the draw, you will win a cash prize, ranging in value from £5 to £1,000,000.

There is debate, however, as to the merits of the Premium Bond scheme. Their initial appeal was based in great part on the fact that anyone could invest. However, the newly established minimum purchase of £100 has meant that they are out of reach for some would-be savers. Similarly, the bonds do not accrue any interest; the only income that you will make from them is prize wins that you might acquire. As a result, these often do not represent a particularly profitable investment.

If you are looking for a more regular return on your money, but you still wish to have the security of the NS&I bond scheme (by which you are essentially lending money to the government), you may be interested in their Savings Certificates. These are available in fixed-interest and index-linked varieties, the latter of which offers a guarantee of inflation-beating rates. The interest rates for these Certificates can be very attractive, and they are well worth a look.

Inheritance Tax

You should always remember, however, that minimising your income tax liabilities is not the whole story. No tax-free savings scheme will incur tax during your lifetime, but the majority of them will be liable for Inheritance Tax. As a result, it is important to make provision for the informed distribution of your assets in your will in order to minimise any potential liabilities. More information on this is available elsewhere on this site.

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