3 Ways To Pay Less Tax On Your Savings
Taxes are a fact of life. But, while you may not be able to avoid paying tax on your income, your shopping or your property, you may be able to earn tax-free interest on your savings.
If you’re a basic rate taxpayer, you’re probably paying 20 per cent tax on your savings interest. And, if you are a higher earner you may be losing 40 or 50 per cent of your savings returns to tax. If you want to ensure you’re getting the very best return on your savings it is vital that they are tax-efficient. Our guide gives you three great tips to paying less tax on your savings.
Maximise your ISA contributions
On 6 April 1999, the government introduced the Individual Savings Account (ISA). This type of account lets you save a certain amount of money each year and you’ll pay no tax on your returns.
In the 2012/13 tax year, the individual ISA allowance is £11,280. You can save up to £5,640 as cash and the remainder in stocks and shares. And, crucially, any money that you place in an ISA will earn gross rather than net interest. This ensures you don’t lose 20 per cent (or 40/50 per cent if you are a higher rate taxpayer) of your interest in tax.
From April 2013 the individual ISA limit rises to £5,760.
There are hundreds of ISAs available and, even if you don’t have the maximum to save, they are a great way of sheltering your savings from tax. Always consider using your ISA allowance before you put your savings elsewhere.
Register for gross interest if you’re not a taxpayer
If you’re not a UK taxpayer, you shouldn’t be paying tax on your savings interest. So, if you earn less than the threshold for paying tax – around £155 per week for under 65s – you should receive ‘gross’ rather than ‘net’ interest.
To do this, you need to speak to your bank or building society and complete a R85 form. This will register you for gross interest and ensure no tax is taken off before you receive your interest.
Take advantage of your partner or child’s tax status
If you have a partner than pays a lower rate of tax then you – perhaps they are a non-taxpayer – you could save your money in your partner’s name in order to benefit from paying less tax.
For example, you may be a higher-rate taxpayer and pay 40 per cent of your savings interest in tax. If your partner is a basic-rate taxpayer and only pays 20 per cent, you can save your money in your partner’s name and only pay 20 per cent tax.
Bear in mind that if you do this your savings will be in your partner’s sole name. Make sure you understand the implications of this before you decide on this course of action.
Another way to reduce the tax you pay on your savings is to open an account in your child’s name. If they earn less than the tax-free allowance then you can build up their savings without any tax being deducted. As above, your child will need to sign a R85 form (or you will need to sign it on their behalf).
You should remember that such an account has to be opened only with the express purpose of saving for your child. There are also restrictions on how much you can gift to your child without paying tax.