Tax on savings and investments Tax saving tips
In the current climate, where savings rates are low, it's more important than ever to make the most of tax-free savings allowances. From April 2016, the first £1,000 (or £500 if you are a 40% taxpayer) interest you receive from an will be tax free, but anything above this is potentially taxable.
If you hold investments outside a stocks and shares Isa, the first £5,000 you receive in dividends will be tax-free but above this you will be taxed at 7.5%, 32.5% or 38.1%, depending on your tax status.
1Use your tax-free cash Isa allowance
Interest earned on money in a cash Isa is completely tax-free. You can save up to £15,240 in the 2016-17 tax year.
Find out more: - find the best rate for your savings with our live tables, updated daily.
2Invest in a stocks and shares Isa
Investments held in a stocks and shares Isa are tax-free. In 2016-17 the maximum annual investment in an Isa is £15,240. You can put the full amount into a stocks and shares Isa, a cash Isa or divide it between the two.
Find out more: How to invest - build the perfect investment portfolio using our unique tool.
3Invest through the Enterprise Investment Scheme or a Venture Capital Trust
The government offers tax relief on several types of investment. The best-known is the Enterprise Investment Scheme (EIS), where you get tax relief at 30% of the cost of the shares you buy in an approved unquoted company – usually a start-up business. The amount you can invest is capped at £1m, which would cut your tax bill by up to £300,000. The main condition is that you hold the shares for at least three years.
Similar relief is given to those who invest in Venture Capital Trusts (VCTs). The rate is also 30% but the limit is £200,000, so the most you can claim is £60,000. You are required to hold shares for five years.
From April 2012 it has been possible to get 50% tax relief on investments in small new companies under the Seed Enterprise Investment Scheme (SEIS). The maximum investment is £100,000. In each case, capital gains tax is waived when you eventually sell your shares. All these investments are high-risk, so don’t let a potential tax saving cloud your judgment.
4Transfer savings and investments to your partner
Transferring savings and investments to your partner can save tax if you are part of a couple where one person is in a lower tax band than the other.
It's advantageous to transfer savings and investments from the partner in the higher band to the partner in the lower band and particularly worthwhile if one partner is a non-taxpayer because their income is below their tax-free personal allowance.
Find out more: Tax, rates and allowances - find out what you need to pay for the current tax year.
5Get overpaid tax refunded
If you are a non-taxpayer, make sure you claim back any tax you have overpaid on your investments or savings. You need form R40 from HM Revenue & Customs (HMRC).
Find out more: Tax appeals, disputes and complaints - how to tackle HMRC if you think you're owed a tax refund.
6Hold shares in your employer
If your employer offers you free shares or the right to buy shares on special terms through a government-approved scheme, such as the Share Incentive Plan, Company Share Option Plan or Enterprise Management Initiative Scheme, the value of the shares is exempt from income tax and national insurance. You may have to pay capital gains tax, however, when you come to sell them.
Find out more: Investing in equities - get the lowdown on investing in shares and how they work
- Tax rates, allowances and amounts - check the 2015-16 thresholds
- Which? Money Helpline - for your tax queries
- Suspect you've paid too much tax on your savings? - follow our guide
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