Tax-Free Savings: Where Are We Now?

The tax benefits associated with individual savings accounts (ISAs) have always made them attractive to those wishing to save, but for many years there were only two types of ISA available to investors - cash ISAs, and stocks and shares ISAs. Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK; to hold a stocks and shares ISA, the investor must be aged 18 or over and resident in the UK. The maximum annual investment limit is £15,240 for 2016/17. Interest received is tax-free and there is no income tax or capital gains tax payable on investments. 

The popularity of these accounts has led the government to expand the range of ISAs on offer, with the objective of encouraging more people to save for their future requirements.

Junior ISAs have been available since 1 November 2011 for UK-resident children (under-18s). Junior ISAs are tax-relieved and have many features in common with existing ISA products. They are available as a cash or ‘stocks and shares’ product. The maximum investment limit for 2016/17 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. 

Until April 2015, it was only possible for children who did not hold child trust funds (CTFs) to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates. However, since April 2015 all children (under-18s) who are UK resident should be able to hold a Junior ISA and transfers from CTF accounts to Junior ISAs are allowed. This change is important, as it allows parents to look for a better return on their investment, pay lower charges and have more choice of products.

Help-to-buy ISA were introduced from 1 December 2015 and are specifically designed to help first time buyers aged 16 and over) save a deposit to purchase their first home. Broadly, investors can save up to £200 a month towards their new home and the government will boost their savings by 25% (subject to certain restrictions). Key features include:

The maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000. Since accounts are limited to one per person rather than one per home, a couple buying together will be able to save up to £30,000 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.

Launched in April 2016, innovative finance ISAs can hold peer-to-peer (P2P) loans, which often pay significantly higher returns than cash accounts. Broadly, P2P lenders act as middlemen by matching people who wish to invest cash with those who want to borrow money. From 6 April 2016, interest and gains from P2P loans qualify for tax advantages where these loans are made through an Innovative Finance ISA. 

Details of a new help-to-save cash account, designed to help people on low incomes (very broadly, those in receipt of tax credits) save for a rainy day, have recently been published. The accounts, which will be provided by National Savings and Investments (NS&I) and administered by HMRC, are expected to be available by April 2018. Investors will be entitled to a 50% bonus on savings of up to £50 a month - people will be able to save up to £2,400 over four years, and benefit from total government bonuses worth up to £1,200. 

In most cases the personal allowance and the new personal savings allowance will cover any tax liability arising on interest earned. Therefore, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment, rather than the tax-free status of the account.