How to Avoid HMRC Taxing Your Savings

Saving money is a crucial step towards financial security, but HMRC may have an eye on that financial cushion you’ve been building.

Understanding how savings taxation works and exploring strategies to minimise your tax liability can help you keep more of your hard-earned money.

So what can you do to minimise the raids on your savings?

Utilise your Personal Savings Allowance (PSA):

The PSA allows you to earn a certain amount of savings interest tax-free.

• Basic rate taxpayers: Can earn up to £1,000 of savings interest tax-free.
• Higher rate taxpayers: Can earn up to £500 of savings interest tax-free.
• Additional rate taxpayers: Can earn up to £500 of savings interest tax-free.

To keep a lid on the tax leakage you should spread your savings: fistribute your savings across multiple accounts to ensure you stay within the PSA limit for each account.

If you’re a higher-rate taxpayer, explore savings accounts specifically designed for higher-rate taxpayers, which may offer more tax-efficient options.

Exploring tax-free savings accounts

Any savings interest earned above your PSA is subject to income tax at your marginal income tax rate. You can minimise this:

• ISA (Individual Savings Account): ISAs offer tax-free growth on your savings and investments. There are different types of ISAs, including Cash ISAs and Stocks and Shares ISAs.
• Lifetime ISA (LISA): This account offers a government bonus of 25% on your contributions (up to a certain limit) towards a first home or retirement.
• Consider National Savings & Investments (NS&I):
  • Premium Bonds: Offer the chance to win prizes tax-free.
  • Income Bonds: Provide a fixed rate of interest, which may be partially or fully tax-free depending on your income tax band.

Invest in Tax-Efficient Investments:

• Stocks and Shares ISAs: Allow you to invest in a range of assets, such as shares, bonds, and ETFs, within a tax-free environment.
• Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs): Offer significant tax benefits for investing in early-stage companies.

Whatever your approach, remember that tax rules and allowances can change. It’s crucial to stay updated on the latest tax legislation. Or, rather, we can do that for you. If you’re worried that your saving plans are being compromised, then get in touch and we can devise the best ways for you to keep more in your piggy bank.