Tax-Free Savings In 2017/18

Sarah Laing highlights some potential tax-efficient savings opportunities for the new tax year. 

This article runs through some of the most popular tax-efficient savings opportunities currently on offer, and highlights relevant changes to investment limits and potential yields.

Broadly, cash individual savings accounts (ISAs) are available to investors aged 16 and over, who are resident in the UK, and stocks and shares ISAs are available to UK-resident individuals aged 18 and over. The maximum annual investment limit rises to £20,000 from April 2017, which means that a couple can invest up to a sizeable £40,000 for 2017/18. Interest paid on the investment will be completely tax-free – there will be no income tax or capital gains tax payable.

Junior ISAs are available to UK-resident children under 18 and, along similar lines to ‘adult’ ISAs, interest received is tax-free. The maximum investment limit for 2017/18 is £4,128, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. It is now possible for children to hold both a Junior ISA and a child trust fund (CTF), 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 provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. The maximum that can be saved in the ISA is £12,000. 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. It will take around four and a half years to achieve this level of savings under the scheme.

Premium bonds cannot really be called an investment, but any returns on the investment by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month have been reduced, and are currently 30,000 to one. In addition, the number of monthly £100,000 prizes has been reduced from five to two and, for the £50,000 prizes, from twelve to just five. The prize fund rate has recently fallen from 1.35% to 1.25%. This is the amount a typical saver will receive with average luck over a year – but many will receive far less than this. However, despite the reduction in prizes and odds, with more than £52 billion currently invested, premium bonds remain one of Britain’s favourite ways to save in a tax-efficient way.

The personal savings allowance (PSA), which was introduced from 6 April 2016, will remain at its current level of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, for 2017/18. Running alongside the PSA is the starting rate for savings, which, for 2017/18, will remain at 0% on a maximum threshold of £5,000. The 0% band is restricted by non-savings taxable income, so that none of the band will be available if that income is above the personal allowance (and blind person’s allowance if claimed) plus the £5,000 starting rate. The two allowances work together and are dependent on total taxable income.

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-free status of the account.

The government intends to make regulations so that the ISA savings of deceased individuals can continue to benefit from income tax and capital gains tax advantages, where those savings are retained in an ISA. Although the start date for this change has yet to be confirmed, it should be borne in mind when thinking about ISA investments. Financial advice from a suitably qualified and experienced independent financial adviser is generally recommended.