Posted by admin - April 14, 2016 11:44 am Savings – making the most of your money

Each year the Government’s Budget and market conditions give both challenges and opportunities which, with the right strategy, can limit your tax and/or maximise your savings.

Here are some things for savers to consider for the 2016/17 tax year.

1) Match the product to your savings strategy

Interest rates on savings have been low for a few years and consequently ISA’s are an under-used opportunity to earn tax-free income. For many savers the tax advantages on the interest earned are so low that they do not see the point of using an ISA instead of a regular savings account. Reduced restrictions on cash ISAs now mean that if you withdraw money from your cash ISA during a tax year you can replace it within the same tax year without it counting towards your annual ISA allowance. This makes these ISA’s far more flexible for temporary savings.

But due to the new personal savings allowance from 6 April 2016 and the low level of current interest rates, many individuals would need to have very large savings balances before they would pay tax on interest earned. Some savings accounts offer greater levels of interest than the ISA’s available and so may be more attractive for short-term or medium-term savings.

However long-term savers also need to consider the potential future benefits that ISA’s can provide. Whilst interest rates are low for now, if we were to return to levels experienced throughout the 1990’s and the majority of the 2000’s, then individuals could see 5% returns on their savings. Savers who utilise the annual ISA allowance each year (£15,240 for the 2016/17 tax year) would have an ISA pot of over £150,000 in 10 years, which at 5% interest would generate tax free income of £7,500 per year.

2) Transfer savings

Consider transferring savings or investments to your husband, wife or civil partner if they pay tax at a lower rate than you do.

3) Other investments

Some investments have the potential for greater rewards but with greater risk. Depending on your appetite to risk you may consider investing some of your savings in shares which will generate income through dividends. From 6 April 2016, the first £5,000 you receive in dividends from investments each tax year will be tax free.

4) Company shareholders

From 6 April 2016 basic rate taxpayers can now earn up to £1,000 a year in savings interest before they have to pay any tax on it, while those on a higher rate are getting a tax-free allowance of £500 a year. If you’re a company shareholder in an owner-managed business you may want to consider whether your money would be more wisely invested in your company. Investing in the future of your business can bring much greater returns than through savings. On top of this you could charge a market rate of interest on any money you lend to the company. The company may have this as a tax allowable deduction and you will earn a higher rate of interest than you would get from the bank.

Alternatively if your company already owes you money then why not agree a formal rate of interest and make use of that savings allowance to generate some tax-free income.

5) Junior ISAs

You can make use of a Junior ISA to avoid being taxed on some gifts made to your children. The savings are tax-free and can be converted into an adult ISA from when the child reaches 16. The annual savings limit for a Junior ISA for 2016/17 is £4,080.

6) Consider the benefit of paying off your borrowings

We all like to have money set aside for a rainy day, but you will generally always pay more interest on your borrowings than on your savings. Savers with borrowings should consider the short term benefits of paying off their borrowings, particularly where their savings are taxable and their borrowings not tax deductible. If you are a homeowner with a mortgage then you could be better off paying an element of your savings off your mortgage. For those on fixed rates many mortgage products now allow you to overpay up to 10% of the balance of your mortgage (based on the balance outstanding at the start of your mortgage product year) without incurring early repayment charges.

Whatever your savings goals, having the right advice can make a big difference. At McCabe Ford Williams we pride ourselves on offering an all-round service and your local office can give you the details of an Independent Financial Advisor who can provide you with detailed investment advice to help make your money work for you.

To book a free consultation call your local MFW office Ashford, Cranbrook, Dover, Herne Bay, Maidstone and Sittingbourne.

Please Note:

The information contained within this article is based on our understanding of present law and HM Revenue & Customs practice, which may be subject to change. The value of any tax benefits depends on individual circumstances.

Any decision regarding your savings should not be made on the basis of this article alone.

We are registered to carry out audit work in the UK and Ireland and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales.