When you put your money into a savings account its important to make sure you are making the most of your savings and paying as little tax as possible.
Anyone who living in the UK and earning more then £6,475 per year will have to pay tax on any interest earned from savings. Basic tax payers will have to 20% tax on any interest earned from savings and for those who pay the higher tax rate will have to pay 40% on any interest earned. These deductions can make a significant difference in the growth of your savings. Luckly, there are several ways that you can reduce the amount of tax you have to pay on your savings.
Cash ISAs
Anyone who lives in the UK over the age of 16 has an ISA allowance of £10,200 for each financial year (6th April to 5th April). Your ISA Allowance can be invested into a cash ISA completely tax free. You should always use your ISA Allowance and take advantage of the tax free income before you consider a standard savings account. Click here for more information on on cash ISA saving accounts.
R85 Forms
If you earn less then £6,475 per year, then you entitled to tax free savings. It may be worthwhile filling out an R85 form for your bank. This form will inform your bank that they shouldn't deduct any tax from any interest earned on your savings. The R85 form can be obtained from either your bank or building society or you can download it from the Inland Revenue's website click here. The R85 form will need to completed every year for which you earn less then £6,475.
Spousal allowance
Being married can also work to your advantage when it comes to your savings. For example if you have some unused tax allowance or if you pay a lower rate tax then your partner, your partner can transfer some of their savings into your name, this will reduce the amount of tax deducted from your savings helping you earn more from your money. This is only possible for married couples who have separate saving accounts and not to those who have joint accounts.
Saving for your children
Your children are also entitled to the same tax allowance as you, however most dont earn enough to be taxed on their savings. Its worthwhile filling in a R85 form for your child to ensure their savings are tax free. Childrens savings accounts usually offer better rates then that of adult saving accounts so it makes sense to set your little ones off on the right foot.
However, if the childs account earns more then £100 interest in one year the will treat it as parental income and therefore result in paying tax on their savings. Interest earned on any money contributed by the child, friends or family are not subject to this rule, so it benefit you more to buy presents for your childs birthdays and christmas and ask family and friends to give them money instead!
Offset your mortgage
If you are a homeowner you could avoid paying tax on your savings by using an offset mortgage. This works by combining your mortgage, savings and current account with a huge overdraft so that any of your savings are set off against it. The interest rate you get on your savings is at the same as your mortgages interest rate. It is the equal to earning tax-free interest on your savings at the same rate as your mortgage and it's more efficient than using your ISA because it offers you a higher rate of interest which means you can save your ISA allowance for stock market investments.
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