What are tax-free savings accounts?
Saving is a sensible way to help secure your or your family’s future, and it can be even more rewarding when you can save tax-free. This is where tax-free savings accounts, such as ISAs and Tax Exempt Savings Plans, which are unique to friendly societies like us, come into play.
Here, we explore tax-free savings accounts, looking at what they are, how much you can save and the range of products we offer.
How many tax-free savings accounts can you have?
When it comes to ISAs there are two basic types – Cash and Stocks & Shares. Every UK resident can pay money into one Cash ISA and one Stocks & Shares ISA in each tax year. The ISAs don’t have to be with the same provider (such as Foresters), and you can transfer either or both ISAs to another provider at any time. However, you cannot take out two Cash ISAs or two Stocks & Shares ISAs in the same tax year (a tax year runs from the 6th April to the 5th April the following year) and the amount you pay in cannot exceed your annual ISA allowance which the HMRC controls.
Tax Exempt Savings Plans are unique to friendly societies and provide a separate and additional tax-free savings allowance to ISAs. Under current legislation each person (including children) can save up to a maximum of £25 a month in a Friendly Society tax free regular savings plan.
What is the annual tax-free savings allowance?
The amount that you can pay into an ISA in the current tax year, known as your annual ISA allowance, is set at £20,000. In the case of a Lifetime ISA the allowance is £4,000 and this counts towards your full £20,000 annual ISA allowance. This means that if you pay £4,000 into a Lifetime ISA in a tax year, you can then only pay up to £16,000 into a Cash and/or Stocks & Shares ISA.
You can put all of your annual savings allowance into a Cash ISA, or into a Stocks & Shares ISA, or you can use a combination of both and split your allowance between the two types.
When it comes to Tax Exempt Savings Plans which offer an additional tax-free allowance alongside ISAs, the maximum you can pay into it each month is £25, which totals £300 a year.
What is a tax-free ISA and why are they tax free?
ISAs are tax-efficient savings and investment accounts available to all UK residents and there are two basic types of ISA to choose from – Cash ISAs and Stocks & Shares ISAs.
Cash ISAs are more like ordinary savings accounts. You pay in money and the interest you earn in your Cash ISA is tax free. The money you invest is also completely safe, as in it will never reduce in value, but the interest rates that Cash ISAs offer are usually lower than the interest earnings potential of Stocks & Shares ISAs.
With a Stocks & Shares ISA, rather than simply saving you are investing your money in things like stocks and shares, with a view to growing your savings more over the longer term. You don’t pay tax on any income or capital gains made on your investments. As with any investment linked to the stock market, depending on how the stock market performs, the value of your investment could go down as well as up and there’s a risk you may get back less than you put in.
You can save up to £20,000 into a Stocks & Shares ISA, or a Cash ISA, or a combination of both in the current tax year.
Find out more in our blog: How much can I save in an ISA? And other essential ISA rules.
How much money can you save for your child tax-free with a Junior ISA?
Junior ISAs are a great way to save for your child’s future while reaping the rewards of tax-free savings. Once opened by a parent or guardian, family and friends can currently invest up to £9,000 on behalf of the child in the current tax year.
Find out more in our blog: What is a Junior ISA and how do they work?
What is the best tax-free savings account for me?
Deciding on the best tax-free savings option for you depends on your investment amount, financial goals, the purpose of your investment and your lifestyle.
At Foresters Friendly Society, we offer a wide range of tax-free savings accounts that could complement your financial plans, such as:
- Stocks & Shares ISA – to help you put a little away for the medium to long term
- Lifetime ISA – to help you save towards your first home or your retirement
- Junior ISA – to help you save for your child’s future
- Tax Exempt Savings Plan – affordable and regular tax-free savings in addition to your ISA allowance
- Child Tax Exempt Savings Plan – affordable and regular tax-free savings for your child or grandchild’s future
Find out more today
If you would like to find out more about our range of tax-free savings accounts and their many benefits, contact us today, our friendly, expert team are on hand Monday to Friday from 9am to 5pm.
Please note the value of an investment linked to the stock market could go down as well as up, depending on how the stock market performs, and there’s a risk you may get back less than you put in. Tax rules may change in the future and depend on your individual circumstances.
The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.