When you check your savings account and see that bit of interest earned, it feels like a small win. But then tax season rolls around, and you might wonder if there’s a way to keep more of that hard-earned money for yourself. The good news is that while you can’t technically “avoid” tax on interest income, there are completely legitimate and smart strategies to minimize what you owe.
It’s all about understanding the rules and using the financial tools available to you. By making a few informed decisions, you can ensure your savings are working as efficiently as possible for your future.
Making the Most of Your ISA Allowance
One of the most straightforward ways to shield your savings from tax is by using an Individual Savings Account (ISA). Every tax year, you get an ISA allowance, which is the amount you can save without paying any tax on the interest or investment growth. The key here is that the interest you earn inside an ISA is tax-free. You can choose from a Cash ISA, a Stocks and Shares ISA, or other types, depending on your goals. It’s a simple and effective first step for any saver.
Utilising Your Personal Savings Allowance
Outside of an ISA, most people also benefit from a Personal Savings Allowance (PSA). This is the amount of interest you can earn from standard savings accounts each year without being taxed. For basic-rate taxpayers, this allowance is £1,000. For higher-rate taxpayers, it’s £500. If your total interest from all your savings stays below this threshold, you won’t pay any tax on it. This makes it easier to manage smaller savings pots without any extra paperwork.
Considering Savings in Your Partner’s Name
If one of you is a non-taxpayer or a basic-rate taxpayer while the other is a higher-rate taxpayer, it might be beneficial to hold savings in the name of the person in the lower tax band. This strategy can help you make the most of both partners’ PSA and keep the family’s overall tax bill lower. It’s a simple conversation to have about how you structure your finances together.
Looking at Other Tax-Efficient Options
For longer-term goals, especially retirement, a pension can be a powerful tool. Contributions to a pension often receive tax relief, which means the government adds to your savings. While the money is locked away until you retire, it grows in a tax-efficient environment, making it a fantastic option for building future financial security beyond your immediate savings.
By using these methods, you’re not trying to sidestep the rules but are instead using them to your advantage. A little planning with your savings can help you hold on to more of your money, letting it grow for the things that matter most to you.
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