Tax free savings

If you want to make your money grow easily then you need to make sure you are being tax efficient with your savings.  If you don’t hold your savings and investments tax-efficiently then the taxman will take his share of your income. And if you’re lucky enough to make large gains on your investment, then you could end up paying capital gains tax on the growth.

What tax-free savings are there?

Isas

By far the most popular tax-free savings and investments are Isas (individual savings accounts  In this tax year (2011-12) you can shelter up to £10,680 in Isas and the tax man can’t get his hands on it. For the 2012-13 tax year, the limit increases to £11,280.

With these limits, you can put up to half in a cash Isa with the remainder in a share Isa – or you can have the full amount in a share Isa. However, remember that the Isa is simply a framework that allows the underlying savings or investment to be tax-free.

That means there is a huge difference between the rates you’ll get on cash Isas:  just being tax free isn’t enough – you still need to seek out the top rates as you would for any savings account. And with share Isas, it’s the underlying investment that matters.

The tax benefits for share Isas are not as great as they used to be because the 10% dividend tax credit within Isas was abolished years ago. However, for higher rate taxpayers there’s still an advantage holding shares in an Isa.

Pensions

While most people don't consider pensions to be an investment, they are: and they are a very tax efficient way to save because you get upfront tax relief on your investments. So, for example, if you are a basic rate taxpayer wanting to £100 in a pension it will actually only cost you £80 and for a higher rate taxpayer it is £60 – the tax you get back makes the investment up to £100. But remember that when you come to draw a pension, the income from it is not tax free.

Friendly society plans

There are other tax free investments such as friendly society plans which allow you to save up to £25 a month over 10 years tax free. However, the charges on these plans can be high and the performance of some of them in recent years has not been impressive, so do check their track record to give you some indication of how well your savings will do in future.

National Savings & Investments

NS&I also offers tax-free savings including index-linked and fixed savings certificates, but at the moment these are not on sale. Premium bond prizes are also tax free.

Remember that if you are not a taxpayer then you shouldn’t pay tax on your savings anyway – fill in form R85 available from your bank or building society. Without this you will lose at least 20% of the interest you earn in tax as it's automatically deducted by the bank or building society before you receive it. Do make sure that you fill in a form for your children too.

Also, if you pay tax at a higher rate than your partner, then it makes sense for tax reasons to hold you savings in their name to boost the interest – although do make sure you trust them enough not to spend all the cash!