Investment planning, Retirement

Tax-Efficient Saving Strategies Made Easy

21 September 2023

Saving money is a crucial part of financial planning, but it’s equally important to ensure that your hard-earned money isn’t unnecessarily eaten up by taxes. There are various tax-efficient saving strategies available in the United Kingdom that can help you maximise your savings while being on the right side of the law. People often hear words like ‘tax-efficient saving strategies’ and instantly think this is too complex for them or that they aren’t accessible for them. Not only is this untrue in a lot of cases, but the options listed in this article will be accessible to you – as well as potentially making a huge difference to your yearly take-home pay.

Individual Savings Accounts (ISA’s)

Let’s start with an obvious one – Individual Savings Account. ISAs are one of the most popular and straightforward tax-efficient saving options in the UK. They offer a tax-free way to save or invest money up to a certain annual limit. Let’s say you have £20,000 that you want to save or invest. You can put this money into a Stocks and Shares ISA, where it can grow through investments in stocks, bonds, or funds. Any returns you earn within the ISA, whether from capital gains or dividends, are entirely tax-free. On top of that, you can pay up to £20,000 into your ISA completely tax free, potentially lessening your tax burden for the year by bringing you under a certain tax band.

There are several types of ISAs available to you in the UK, including Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs. A Cash ISA is a type of savings account where you can deposit your money, and any interest you earn on it is tax-free. It’s a straightforward way to save money without worrying about paying tax on the interest you earn, whilst it remains low risk as your money is protected up to a certain limit by the Financial Services Compensation Scheme (FSCS).

A Stocks and Shares ISA differs slightly but is an excellent way to invest your money in the stock market while enjoying tax benefits. With this ISA, you can buy shares in companies, investment funds, or other assets like bonds and watch them grow a lot faster. Of course, the value of your investments can go up and down with the stock market, so this option involves more risk compared to a Cash ISA. Much like the Cash ISA, however, the returns on your investments are generally tax-free.

An Innovative Finance ISA is a tax-efficient account created for peer-to-peer lending and alternative finance investments is known as an ISA. With an IFISA, you can invest in peer-to-peer loans or other innovative financing options while keeping your profits tax-free. It’s a means to possibly earn more interest or returns than standard savings accounts, but it also carries more risk because you’re lending money to individuals or small businesses. Because IFISA investments are not as regulated as regular savings accounts or equities and shares, it is critical to conduct study and comprehend them.

Pension Contributions

Contributing to a pension plan is not only a wise method to save for retirement, but it is also a very tax-effective technique. Pension contributions might lower your taxable income in the year they are made. This can be useful if you’re about to enter a higher tax bracket or wish to reduce your tax liability in a given year.

When you contribute to a pension, the government gives you tax breaks at your highest marginal tax rate. The money invested in your pension pot grows free from capital gains tax and income tax on dividends. This allows your investments to potentially grow more quickly over time compared to a regular taxable investment account.

Assume you make £30,000 per year and wish to contribute £1,000 to your pension. With basic rate tax relief of 20%, the government will contribute an additional £250, bringing your total contribution to £1,250. This means you only pay £750 out of pocket, while your pension fund benefits from the additional £250.

However, it’s important to note that there are limits on how much you can contribute to a pension each year while still receiving tax benefits, and these limits can vary by country and type of pension scheme. Additionally, the tax rules surrounding pensions can change over time, so it’s wise to seek advice from a financial advisor or tax professional to understand the current regulations and how they apply to your individual situation.

Marriage Allowance

The Marriage Allowance is a tax credit for married couples and civil partners in the United Kingdom. It permits one partner to transfer a portion of their unused personal tax allowance to their spouse or civil partner, potentially lowering the couple’s overall tax burden. As of September 2021, the partner earning less than the existing personal allowance criteria (usually the lower-earning partner) can transfer up to £1,260 of their unused allowance to their higher-earning partner. This implies that the higher-earning partner can earn more money before having to pay income tax, potentially lowering their tax bill. It is important to note that tax regulations and thresholds are subject to change, therefore people should verify with HM Revenue & Customs.

Even for individuals with little financial expertise, navigating the realm of tax-efficient saving strategies in the United Kingdom does not have to be difficult. You may maximise your savings and investments while minimising your tax liability by knowing and applying these easy measures. Remember that tax rules and regulations are subject to change, so it’s critical to stay informed and seek assistance from financial specialists as needed.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

Be informed: We don’t offer Cash ISAs, Lifetime ISAs, or Innovative Finance ISAs. We can refer you to a Cash ISA provider for those services – just get in touch with us or your SJP Partner.   

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