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Derin Clark

Derin Clark

Online Reporter
Published: 23/04/2020

For those fortunate enough to have money left over at the end of the month, putting the extra money into a savings account is a great way to save towards a holiday, a new car or just a rainy day. But to ensure that money saved goes towards your end goal, it is important to be aware of when savings are tax-free or taxable. Here, we take a look at different types of savings accounts and how to make your savings as tax-efficient as possible.

ISA savings

The easiest way to save money without paying tax is to open an ISA and keep within the annual £20,000 tax-free limit. The tax-free ISA limit lasts tax year to tax year, starting on the 6 April and ending on the 5 April. The ISA limit for the 2020/21 tax year remains unchanged at £20,000, which means that savers can put any amount up to this limit and not pay any tax on their ISA savings. When the new tax year starts, ISA savers can once again put money into their ISA up to that tax year limit without paying tax on the new money deposited or the money already in the account.

For savers who have built up tax-free savings in their ISA accounts over a number of years, meaning that they have more than £20,000 in their ISA, they can move the money from their existing ISA to a new ISA and retain the tax-free status by transferring the money across. Not all ISAs allow transfers-in, so it is important to ensure that the new ISA allows this, along with checking to see if there are any penalties for transfers-out on the existing ISA, before opening a new ISA. To find out more about transferring money in ISAs, read our guide Things worth knowing about ISA transfers.

The personal savings allowance

Savers with savings or investments in non-ISA savings accounts and who are basic rate taxpayers do not have to pay tax on the first £1,000 of interest earned from their savings or investments, while savers who are higher rate taxpayers do not have to pay interest on the first £500 of interest earned. Our guide How savings are my savings taxed? provides more information about how the personal savings allowance impacts savings.

Those with investments can earn up to £2,000 in dividends before paying tax. If the amount earned through dividends is above £2,000, the tax payable is dependent on the relevant income tax band. Investors can find out the payable tax on dividends on our Moneyfacts Taxfacts guide.

Saving for your child’s future

During the spring 2020 budget, the Government announced that the Junior ISA (JISA) limit would be raised from £4,368 to £9,000. This means that for the 2020/21 tax year, savers can deposit up to £9,000 into a JISA without paying tax. In addition to JISAs, both Child Trust Funds and Children’s Bonds offer tax-free savings options for children. Parents should be aware that if they are using a regular children’s saving account, any interest above £100 earned in a year is taxable.


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