New Year - New Rewards?

Sarah Laing looks at changes to investment limits and potential yields for some of the most popular tax-efficient savings vehicles. 

The maximum annual investment limit for individual savings accounts (ISAs) remains at £20,000 for 2018/19 (of which £4,000 may be saved in a lifetime ISA, see below). Although the investment limit is not being raised for the new tax year, it still means that a couple can add up to £40,000 to ISA accounts during the year – a substantial investment limit – and the interest received will be tax-free. 

Junior ISAs are available to UK resident children under 18 and are run on similar lines to ‘adult’ ISAs. The maximum investment limit for 2018/19 has been raised to £4,260, which continues to give plenty of scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. It is possible for children to hold both a Junior ISA and a child trust fund (CTF) (the CTF investment limit for 2018/19 is also £4,260), allowing parents increased flexibility to look for higher-yielding products.

Help-to-buy ISAs continue to be available to assist first-time buyers save a deposit to purchase their first home. Broadly, up to £200 a month can be saved in the ISA (along with an initial deposit of £1,000, and up to a maximum of £12,000) and, provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. Taking into account the government bonus, a couple buying together could save up to £30,000 tax-free towards the purchase of their first home, but it will take around four and a half years to achieve this level of savings under the scheme.

Lifetime ISAs can be used by people aged between 18 and 40 to save for a first home or later life (subject to certain conditions). A total of £4,000 may be invested each year until aged 50. The government will add a 25% bonus to savings, up to a maximum of £1,000 a year. 

Disappointingly, the government has recently confirmed that the new help-to-save scheme will not be fully available until October 2018. Ministers had originally said that the new accounts would start ‘no later than April 2018’ but this is not to be the case. 

Broadly, the new accounts, aimed at encouraging people on low incomes to save, will offer a 50% government top-up on savings, and will eventually be available to those receiving working tax credits and some on universal credit. Over time, individuals will be able to save a total of £2,400 in qualifying accounts and receive bonuses of up to £1,200. 

Although premium bonds are not strictly an ‘investment’, they can be encashed at any time with the full amount of invested capital being returned - and in the meantime, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month are currently 24,500 to one. From February 2018, there are two £1 million prizes, four £100,000 prizes and ten £50,000 prizes each month. The total prize fund rate has recently been raised to 1.40%. This is the amount a typical saver will receive with average luck over a year – although many will receive far less than this. 

With a return rate comparable with regular savings accounts, it is not difficult to see why premium bonds remain one of Britain’s favourite ways to save.

As announced at Autumn Budget 2017, the 0% band for the starting rate for savings income remains at £5,000 for 2018/19. Alongside this, the personal savings allowance (PSA) remains at its current level of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, for 2018/19. In most cases, the annual personal allowance and PSA will cover any tax liability arising on interest earned. Therefore, when choosing a savings plan, the major consideration is likely to be the interest rate on offer and potential return on the investment, rather than the tax status of the account.