As the new tax year is underway, now is a good time to review some of the tax-efficient savings incentives available which may help maximise potential returns.
ISAs and Junior ISAs
The maximum annual investment limit for Individual Savings Accounts (ISAs) remains at £20,000 for 2020/21. This means that a couple could save £40,000 a year and receive tax-free interest on that investment. It’s worth noting that there will be no capital gains tax to pay when the account is closed.
Junior ISAs are available to UK-residents who are under 18 years of age. They work in a similar way to 'adult' ISAs except with a lower investment limit. For 2020/21 this is £9,000 (increased from £4,368 in 2019/20).
Lifetime ISAs
A Lifetime ISA (LISA) allows the majority of individuals aged between 18 and 40 to contribute up to £4,000 each year, with the government providing a 25% bonus on contributions at the end of each tax year up to the age of 50. The funds in the account (including the government bonus), may be used to buy a first home worth up to £450,000 at any time from 12 months of opening the account and can be withdrawn from age 60 for any other purpose.
Savers can access the funds in their account if they become terminally ill. Under the normal rules, any other withdrawals that are made will be subject to a 25% charge. To help with the impact of the coronavirus, the Government has confirmed that the charge for unauthorised withdrawals from a LISA during the period 6 March 2020 to 5 April 2021 inclusive has been reduced from 25% to 20%. Further details on this announcement can be found in HMRC's Policy Paper of 14 May 2020.
Premium Bonds
With a return rate of 1.4% currently, Premium Bonds (PBs) remain one of our most popular ways to save. The minimum amount of PBs that can be purchased is £25 and the maximum that may be held is £50,000. Anyone over the age of 16 can buy Premium Bonds on behalf of children. The probability of winning a prize in any given month is currently 24,500 to one with two prizes of £1 million, five £100,000 prizes and ten £50,000 prizes each month.
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.
Help-to-save
The Help-to-Save scheme offers a 50% bonus to working people on low incomes, rewarding savers with 50p for every £1 saved. Over four years, a maximum bonus of £1,200 is available on savings of up to £2,400. Savings limits are flexible, and it is not necessary to pay in every month to get a bonus.
How much is saved and when is up to the account holder. The rules stipulate that investors can save between £1 and £50 every calendar month, up to a maximum of £2,400 over a four-year period.
An account lasts for forty-eight months from the date it is opened and the government bonuses are added at the halfway point (i.e. after two years) and at the end of the four year lifespan of the account, or on the date that the individual becomes terminally ill or dies, if earlier.
Accounts will be available to open until September 2023.
As the current high street bank interest rate is typically between 1% and 2% on savings bonds, the Help-to-Save scheme does look like an especially appealing option for someone planning to save.
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