Income tax on savings and investments
By Ian Robinson
Article 3 of 4
See our round-up of savings products that guarantee you'll pay no tax on your returns.
Tax-free saving and investing is easier since the introduction of the personal savings allowance and dividend allowance in 2016.
But there are a few products available that allow you to grow your money without having to worry about tax at all, even if you exceed the new allowances.
- Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
Cash Isas are completely free of income tax and capital gains tax. They are available to UK residents over the age of 16.
In 2017-18 you can pay £20,000 into a cash Isa (£15,240 for 2016-17).
You can also switch previous years' Isas to new Isa providers without affecting your current year's allowance. It is possible to transfer money held in a cash Isa into a stocks and shares Isa.
Find out more: To find a good home for your savings and shelter it from tax, the Which? Money Compare tables let you search hundreds of savings accounts and cash Isa deals from providers large and small, so that you can find a good home for your nest egg.
Stocks and shares Isas
The same subscription limit applies to stocks and shares Isas - £20,000 in 2017-18 and £15,240 in 2016-17. You have to be at least 18 years old to invest in a stocks and shares Isa.
You can choose to invest the whole of your allowance into a stocks and shares Isa, put your full allowance into a cash Isa, or divide it between the two.
Find out more: Stocks and shares Isas explained – find out more about investing in this tax-free wrapper.
Junior Isas and child trust funds
Child trust funds are investment funds for children that are also tax free, and can be rolled over into an Isa when they mature on your child's 18th birthday.
There are two types of child trust funds: cash child trust funds, which are completely tax-free, and share-based child trust funds which, like stocks and shares Isas, have dividends paid to them with 10% tax already deducted.
Junior Isas replaced child trust funds in November 2011. The total amount you can invest in 2017-18 is £4,128 (£4,080 for 2016-17). This can be all in one type of account or split between a Junior Cash Isa and a Junior Stocks and Shares Isa.
Find out more: Junior Isas – find out the best rates available for this children's savings account.
Lifetime, Help to Buy and Innovative Finance Isas
Several special-purpose Isas have popped up in recent years, offering new options for aspiring homeowners, or for people who want to take advantage of leftfield investment opportunities, such as peer-to-peer lending.
These products carry more terms and conditions than vanilla cash or stocks and shares Isas, and not everyone will be eligible.
The lifetime Isa is due to launch in April 2017. Investors can save up to £4,000 a year. The account pays up-front tax relief at the basic rate, effectively adding £1 for each £4 invested.
Lifetime Isas are only available to under-40s, and there are penalties if you access the money before 60, unless you’re using the money to buy your first home.
Help to Buy Isa
The Help-to-Buy Isa works like a cash Isa, but the government will top up your savings if you ultimately use them to put a deposit on your first home. You can save up to £200 a month, plus an initial £1,000 lump sum when you open the account.
The bonus is worth £1 for every £4 you save, with a maximum top-up of £3,000. This is only available to people who have never owned a property before.
Innovative Finance Isa
The innovative finance Isa allows you to invest in peer-to-peer loans and crowdfunding schemes while benefiting from the traditional Isa’s tax breaks. You can use some or all of your annual allowance, providing you haven’t used it elsewhere.
Find out more: What is an Isa? - understand the different ways you can save and invest tax-free
National Savings & Investments
National Savings & Investments (NS&I) offers several tax-free products, including a cash Isa, savings certificates (fixed-interest and index-linked) and children's bonus bonds.
Prizes and winnings
Winnings on premium bonds and the lottery are tax free. This is also true of other gambling prizes - such as football pools, horse racing and the proceeds of spread betting.
- Last updated: April 2017
- Updated by: Tom Wilson