ISAs and other tax-efficient ways to save or invest

If you save with a Cash ISA, set up a reminder for when the introductory rate ends and shop around.

ISAs are tax-efficient savings and investment accounts.

You can use them to save cash or invest in stocks and shares.

You can pay your whole allowance of £20,000 (for 2023/24) into a Stocks and shares ISA, or into a Cash ISA or any combination of these.

You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.

The Lifetime ISA is a longer-term tax-free savings account that will let you save up to £4,000 per year and get a government bonus of 25% (up to £1,000). As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within a Lifetime ISA.

It’s designed for first-time buyers between the ages of 18 and 40 to use towards a deposit for their first home or towards future retirement savings once they hit 60 years of age.

Some ISA providers now offer a flexible facility which will let you withdraw and replace money from your ISA, provided it is done within the same tax year, without affecting your annual ISA allowance.

Not all ISAs will let you do this and you should check with your ISA provider that your ISA has this function.

This flexibility is currently not available for Junior ISAs or Lifetime ISAs.

An innovative finance ISA (IFISA) lets you use your tax free ISA allowance while investing in peer to peer (P2P) lending. They work by lending your money to borrowers and in return you receive interest based on the length of time and the risk of your investment.

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

Comparison websites won’t all give you the same results, so it might be a good idea to use more than one site before deciding.

It’s also important to do some research into the type of product and features you need before making a purchase or changing provider.

Junior ISAs are a great way to save tax-efficiently for your children.

Family and friends can put up to £9,000 into the account on behalf of the child in the 2023/24 tax year.

There’s no Income Tax or Capital Gains Tax to pay on the interest or investment gains.

Junior ISAs are available to any child under 18 living in the UK who doesn’t qualify for a Child Trust Fund.

The scheme is now closed for new applications.

You can now apply for a Junior ISA instead.

But if your child was born between 1 September 2002 and 2 January 2011, they’re likely to have qualified for a Child Trust Fund.

These offer tax-efficient savings and a one-off starter payment from the government.

Currently, parents and friends can contribute up to £9,000 each year (2023/24 tax year) into a Child Trust Fund.

Parents can now transfer savings from Child Trust Fund accounts to Junior ISAs or into an ‘adult’ ISA when the account matures.

Your money is safe with National Savings and Investments (NS&I) because they’re backed by the government.

Premium Bonds are an investment product issued by National Savings and Investment (NS&I).

Unlike other investments, where you earn interest or a regular dividend income, you are entered into a monthly prize draw where you can win between £25 and £1 million tax free.

The government encourages you to save for your retirement by giving you tax relief on pension contributions within HMRC’s annual allowance limits.

Depending on the type of pension scheme you have, tax relief either reduces your tax bill or increases the amount paid into your scheme.

Where tax relief increases the amount paid in, you get the relief even if you’re a non-taxpayer.

On top of this, your pension fund grows tax-free.

When you retire, you can usually take up to 25% of your pension pot as a tax-free lump sum under current rules.

Your regular pension income is then taxed along with the rest of your income.

Alternatively, some pension providers allow flexible access to your pension pot with 25% tax free and the balance liable to Income Tax at your marginal tax rate. Check with your pension provider.

You can also save tax-efficiently for your child’s future retirement with children’s pensions.

You can save up to £2,880 each tax year with the government automatically topping up any contribution by up to £720 (which is tax relief of 20% on your gross (total) contribution). This means your contribution automatically becomes £3,600 per year, per child.

When your child turns 18 they become the owner of the pension. They can continue to contribute or leave the savings invested. They can't access the pension pot, under current legislation before age 55 years, so pensions aren't suitable as short-term savings vehicles.

When they retire, the child can usually take up to 25% of their pension fund as a tax-free lump sum under current rules.

Their regular pension income is then taxed along with the rest of your income.

You’re entitled to a personal savings allowance.

This means you don’t pay tax on the first £1,000 you earn from savings (or the first £500 if you’re a higher rate taxpayer).

If you sell a property or investment that has increased a lot in value, you might have to pay tax on the ‘gain’ (profit).

This is called Capital Gains Tax.

There are two different rates of CGT - one for property and one for other assets. How much CGT you pay depends on whether you have made a profit, your current tax band and your CGT allowance. The capital gains tax allowance is currently £6,000 (2023/24), dropping to £3,000 in 2024/25.

If you make a loss when you sell, you might be able to deduct this from other gains so that your total gain is lower.

You don’t have to pay Capital Gains Tax on:

• investments held in an ISA
• UK government bonds (also called ‘gilts’), or most corporate bonds
• personal belongings worth £6,000 or less when you sell them
• any profit you make when you sell your main home (in most cases) subject to HMRC’s Private Residence Relief rules.

Because you have a separate Capital Gains Tax Allowance (Annual Exempt Amount) for each tax year, if you can carefully time the sale of your investments you could reduce your overall bill.

A financial adviser might be able to help you arrange things so that you pay less tax on your savings and investments.