Posts Tagged ‘tax’


  • 3
  • Apr
  • 14

Decision time, Cash or Investment ISA?

ISA season is almost upon us and so the time has come when thousands of UK people will be thinking about how to prevent the taxman taking a hefty chunk out of their savings.

Designed to be a way to enable savers to earn high rates of interest without having to pay any tax, ISAs have been a popular way to save over the years.

However, with the allowance struggling to keep up with inflation and interest rates painting a bleak picture, many will be wondering whether it’s worth all the hassle.

Which ISA: Cash or shares?.

Well, don’t give it up just yet as there does seem to be a glimmer of hope for these tax-free accounts. People are ploughing more cash back into ISAs – up by over £1,000 on average between 2012 and 2013.

If you’re thinking about taking your chances with an ISA before the end of the tax year, which type will you go for: cash or shares?

What’s the difference?

There are two types of ISA (individual savings account): a cash ISA and a stocks & shares ISA. Despite both offering tax-free benefits, there are some significant differences between the two.

First off, you will need to consider your attitude towards investment risk. With a cash ISA there is no risk – it is simply a standard savings account in a tax free wrapper.

On the other hand, a stocks & shares ISA puts your cash into various funds, trusts, bonds and shares. This means that there is a possibility that the value of your ISA will go down, as well as up.

What is the limit?

As ISAs offer tax-free savings and investments, there is a limit as to how much you can save. For the 2013/14 tax year the ISA allowance is £11,520 – up to half of which can be cash.

So, if you only have a Cash ISA, you can only deposit a maximum of £5,760, whereas if you have stocks & shares ISA investment you can invest the entire £11,520. If you wish to mix and match, you can put up to £5,760 in each.

The ISA allowance is due to increase for the 2014/15 tax year to £11,880, but the same rules apply, so the cash ISA limit will be £5,940.

Don’t forget, the allowance is the amount deposited into the account. If you deposit £5,760, then withdraw it, you will lose all tax free benefits and won’t be able to put any money back into the account until the next tax year.

It’s also worth remembering that any unused allowance does not roll over, so if you don’t use it, you lose it.

Fixed rate or a risk?

Choosing between a cash and shares ISA isn’t as simply as you might think. While a part of that decision will depend on your attitude to investment risk, the most important part should be decided on whether you stand to gain by investing.

A standard Cash ISA is simple, it’s essentially a savings account where you don’t have to pay income tax (which you probably already pay on your salary) on interest. You can easily compare interest rates here and other features to find the most suitable account.

With a stocks & shares ISA, your investments are exempt from capital gains tax – an entirely different kettle of fish.

You are able to earn as much as £10,900 a year in interest before you’re expected to pay this tax. Therefore, the tax free benefits may not even apply to you.

On the other hand, if you are a CGT payer and expect to hit the threshold, an ISA could help cut your costs. Dividend income is taxed at 10%, 32.5% and 37.5%, for basic, higher and additional rate taxpayers respectively. However, in an ISA the maximum rate is 10% – a large saving for big investors.

Rates for top deals

Unfortunately, returns on all savings accounts – including ISAs – have been hit by the low Bank of England base rate. Just last year, it was reported that the average AER on a Cash ISA with a balance of £3,000 was 1.74%.

However, if you spend a bit of time searching, you’ll still be able to benefit from a better-than-average interest rate.

For example, the Aldermore 2 Year Fixed Rate Cash ISA is currently offering 1.8% but if that is not for you, compare other ISAs here.

In terms of stocks & shares ISAs you will want to look at the ‘crown rating’ as supplied by the Financial Express. This is indicative of its past performance and along with the fund risk should guide your decision.

Liontrust Special Situations is currently one of the market leaders, with a crown rating of five, 0% initial charge, 1.75% annual charge and medium to high fund risk.

Jemma Porter - Image Written by : Jemma Porter - Signature
Jemma is a news & research reporter for compareandsave.com.Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.For press enquiries, please visit our Media Centre page.

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Your pension is one of the most tax-efficient investments. As the current tax year draws to a close, you could find that there are several ways of adding to your pension. Before the current tax year ends, it is time to calculate whether or not you can claim back and tax relief, and to see if you can use previous year’s allowances to increase your pension contributions.

Pension top up time?

Your pension contributions qualify for tax relief, meaning that the taxman will add 20% of your contribution on top. If you are a higher rate taxpayer, then on top of the taxman’s contribution, you can also claim back 20% of your pension payments. For every £80 you contribute towards your personal pension, you can claim back £20, meaning that effectively your pension contributions have cost you less each month.

This also works if you have a company pension, although the system is slightly different. If you pay the basic rate of tax, you receive 20% tax relief for every £100 that you pay in to your pension, meaning that for every £100 that is deducted from your wages each month towards your pension, your take home pay is only reduced by £80. If you pay a higher rate of tax, this percentage goes up to 40%, meaning for each £100 contribution, your take home pay is reduced by £60.

However, unlike a company pension, where your tax relief is automatically paid in to your pension, if you have an individual pension and are paying a higher rate of tax, you have to claim back your extra tax relief. To do this you need to fill out a self-assessment tax form and return this to HM Revenue and Customs before the end of the tax year. There are many places offering free tax relief calculators online, including the HMRC website.

Currently, the maximum amount you can pay into your pension each year and still receive tax relief on top of it is £50,000. Once your contributions go above £50,000, you will have to pay an annual allowance charge. As well as losing tax relief, you will have to pay tax on these payments. This is calculated by adding the amount of contribution exceeding £50,000 on to your yearly income to find out which tax band you fall into. The percentage of that tax band is then deducted from your pension savings in tax.

However, if in previous years you have not used the full £50,000 allowance to pay into your pension, you can use the carry forward rules to add up to three previous years’ unused allowance to this year’s allowance. So for example, if each year for the past three years you have only paid in £40,000 to your pension, you could add £10,000 of unused allowance for each of those three tax years to your current allowance. This would mean that this year you can pay up to £80,000 towards you pension and receive tax relief on this.

Using the three year carry forward rule, you can effectively reduce the amount it costs you to contribute to your pension. Remember to act quickly though if you are in a position to do this, as when the current tax year ends, you will lose one of those years of extra allowance. If this was a large sum – for example if you only contributed £15,000 to your pension three years ago, giving you £35,000 of allowance that could be added on to this year’s – you will need to act now before that benefit is lost to you.

If you haven’t got a pension scheme yet, you can still benefit from this by registering for one now and then claiming back the unused allowance in the next tax year. Whether or not you have a pension, you need to be on a registered pension scheme, rather than personal savings, in order to qualify for the carry forward rule.

The current tax year is drawing to an end, but there is still time to add to your pension. Tax relief can be claimed back, reducing the amount you actually had to spend in order to contribute to your pension, and by carrying forward unused allowance from previous years, you can greatly increase the amount of contribution that qualifies for tax relief. Depending on your rate of contribution over the past three years, this could be a sizeable sum.

Jemma Porter - Image Written by :

Jemma Porter - Signature


Jemma is a news & research reporter for compareandsave.com.

Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money.

For press enquiries, please visit our Media Centre page.

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High-interest savings accounts are still struggling to keep pace with rises in the cost of living, mainly because of the current rate of inflation. With precious few accounts offering inflation-busting returns, many Brits have instead stopped saving into instant-access savings accounts altogether, preferring to pay down mortgages and other debts.

High interest savings accounts not keeping pace in real terms

With the Consumer Prices Index (CPI) standing at 4.0 per cent in April, as a basic-rate taxpayer you need to find an account paying an interest rate of 5.01 per cent in order to beat inflation. As a higher-rate taxpayer you will need high-interest savings accounts paying 6.67 per cent.

Indeed, the Guardian recently reported that an investment of £10,000 five years ago would be worth just £9,587 today, allowing for average inflation, interest and 20 per cent tax.

The newspaper found that there are no instant-access savings accounts that will beat or match inflation (taking into account basic rate tax) and no accounts of any type that offer an above-inflation return for higher-rate taxpayers.

Compare savings accounts to maximise your return

If you are a basic-rate taxpayer, you may be considering fixed-interest bonds as the only way to secure an above inflation return. However, unlike instant-access savings accounts you have to commit your cash to a bond for a number of years. With interest rates set to rise over the next couple of years it is also worth considering whether fixing your savings now would be a good idea.

If you are looking for instant-access savings accounts it is important that you shop around for the very best deal. Many good savings rates are available online, although beware of introductory offers that last a short period of time. By all means take advantage of these high-interest savings accounts but remember to switch to another account once your introductory interest rate bonus has ended.

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New research has found that there are now ten times more fixed rate ISA savings accounts than there were ten years ago. With banks ever-increasingly determined to tempt savers with the best savings accounts (it helps them generate deposits to lend as mortgages), fixed-rate ISAs have become more popular over recent years.

Tenfold rise in availability of fixed rate ISAs

The number of fixed rate ISAs – bank savings accounts that pay interest with no tax deducted – has increased from just 14 in 2001 to 139 at the present time, the research from Moneyfacts found.  Indeed, the number of fixed interest ISA savings accounts has more than doubled in just two years.  The figures found that there were 93 fixed ISAs on the market in 2010 and just 56 a year earlier.

Banks increasingly have to offer the best savings accounts to attract deposits which they can use to fund their mortgage lending. We believe this is a result of banks’ increasing dependency on money deposited by savers to fund loan and mortgage lending because the credit crunch increased the cost of lending between banks (the LIBOR). It could also be a result of the increased press about ISAs and the tax savings they offer to consumers, making them a more attractive proposition, especially with interest rates paid on savings being so low and inflation being so high.

Compare savings rates to find the best fixed ISAs

Variable rate ISAs are an uncertain product for banks. This is because savers are able to withdraw the funds from their bank savings accounts without notice. Fixed rate ISA savings accounts, however, provide more surety for a bank as they know how long they can expect to hold onto the deposit.

With so many fixed rate ISAs on the market – almost 100 according to the research – it is important that you compare savings rates before committing your deposit for a fixed period. Many of the best savings accounts require you to commit your savings for up to five years, so you need to be certain that you find the right account.

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What interest rate are you getting on your ISA savings accounts?

According to new research, it could be nowhere near as high as you think. A recent study of ISA providers found that consumers could be losing up to £1,300 every year in interest as rates are often reduced on older Individual Savings Accounts (ISAs) in favour of higher rates to new customers. This difference in interest rates could be costing savers hundreds of pounds every year.

Tax free instant access savings accounts

ISAs are accounts that let you save up to a specified limit each year tax free. Many are instant access savings accounts while other ISAs require you to commit your savings for a defined period of time.

The new research discovered that if you have invested the maximum possible into your ISA each year your total savings will now exceed £50,000. With many banks and building societies reducing interest rates on older savings accounts, you should regularly check your ISAs to ensure you are still benefiting from a good rate of interest.

Compare savings accounts to get the best deal

According to the figures, published in the Daily Telegraph, the average return paid on cash ISAs is 1.71 per cent. However, the newspaper also reports that ‘this average disguises the fact that many ISAs… …pay just 0.1 per cent.’

So, it is vitally important that you head online to compare savings accounts. It is possible to switch ISAs from one provider to another and you should regularly review your rates and switch your savings where applicable. Bear in mind that some of the best ISA savings accounts will require you to commit your savings for a set period and that you may not be able to make any withdrawals during this time.

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  • 12
  • Feb
  • 11

Finding the best savings accounts can be tough. With hundreds of different types of account available, it can be hard to find an account that pays a decent rate of interest in addition to offering the access that you need.

To help you simplify your options when you compare savings accounts, here are three types of product you should consider.

1. Instant access accounts

Instant access accounts are the simplest and most flexible savings products on the market. They offer instant access to your cash whenever you need it. However, the interest rates payable on these accounts are generally lower, reflecting the easy access you retain to your money.

When you compare savings accounts you may find that you benefit from higher rates of interest on postal or online savings products. With no branch overheads to pay, banks and building societies can often offer higher interest rates on accounts which you manage remotely. Online accounts are typically linked to your normal current account and you make deposits and withdrawals on the web via your bank account.

2. Savings bonds

If you are prepared to tie your cash up for a period of time, you will generally earn a higher rate of interest through a savings bond. These typically run for between one and five years and give you a fixed rate of interest for the savings period.

While you may earn a better return, you should be aware that there are typically substantial penalties if you make a withdrawal during the bond period.

3. Individual Savings Accounts (ISAs)

If you are a taxpayer, you should always consider ISA savings accounts.  These allow you to save a set amount each year (currently £5,100, going up to £5,340 on April 6 2011) tax free. You receive your interest gross of any income tax.

ISA savings accounts come in various shapes and sizes. Many offer instant access to your money while some restrict the number of withdrawals you can make.

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Do you have an ISA?

ISAs were introduced in 1999 to replace PEPs and TESSAs.  They are tax-free savings accounts which allow every adult to save a certain amount of money each tax year without paying any tax on the interest earned.

If you don’t have ISA savings accounts, you could be missing out on maximising your savings returns.

Cash ISA savings accounts

There are two types of ISA.  Cash ISA savings accounts are traditional savings accounts offered by most financial services providers.  They allow you to save up to the annual ISA limit (currently £5,100) in a risk-free savings account and you don’t pay any tax on your interest.

Cash ISAs vary from provider to provider.  Some can be opened with as little as £1 and are flexible, meaning you can deposit or withdraw (up to the annual limit) when you wish.  Others have higher minimum investment levels or require you to commit your savings for a certain period.

Investment ISAs

Investment ISAs are based primarily on stocks and shares.  You can invest up to a set annual ISA limit (currently £10,200, less any amount invested in a Cash ISA) in a range of ‘qualifying investments’.  These can be based on the FTSE 100 index or can be riskier funds based in overseas markets.

Lots of ISA savings accounts on the market

Picking the right ISA can be tricky.  So, before you invest your savings, it is vital that you compare savings accounts.  As well as the rate of interest, you should also compare the features and benefits of different ISAs.  Make sure you find an account that offers you the access that you need and don’t commit your money for a set period unless you can afford to do this.

ISAs ‘cost’ the Government £1.6 billion every year in tax relief.  So, if you’re not benefiting from tax free savings already, consider ISA savings accounts now.

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Are you struggling to get a decent return on your savings?

Rates on instant access savings accounts have fallen significantly over the last couple of years.  The credit crunch and the Bank of England’s decision to slash the base rate have meant that it is harder than ever to make your savings work for you.

If you don’t put your hard-earned cash in the top savings accounts, inflation will mean that you are actually losing money in real terms.

Beating inflation

Inflation in July 2010 fell to 3.1 per cent, although this is still significantly higher than the target of 2 per cent the Bank of England is currently trying to meet.  Taking income tax into consideration, it means that as a basic rate taxpayer, you need to earn at least 3.88 per cent on your savings to avoid the value of your money falling in real terms.

If you are a higher rate taxpayer, you will have to earn 5.17 per cent on your savings.

Top savings accounts

Recent research from the Daily Mail has found that only around 7 per cent of the savings accounts currently available on the market offer a return of at least 3.88 per cent.  There are very few instant access savings accounts that offer this rate of interest and many of the accounts that offer this return are savings bonds which require you to commit your money for between three and five years.

Consider savings bonds or an ISA

One way to find an account that will help you beat inflation is to consider an ISA.  Some ISAs are instant access savings accounts and some are more like traditional savings bonds where you have to commit your money for a period of time.  However, all ISAs pay interest without tax being deducted.  This means that if you are a basic rate taxpayer, you only need to find a rate higher than 3.1 per cent to ensure your money is not losing value in real terms.

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