How to grow your savings the tax efficient way

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grow efficiently From ISAs to pensions, and 'gifting' money - we look at how to make your money work harder to build income, reduce how much tax you pay and boost your financial future.

Tax-free savings

All basic rate (20%) taxpayers can receive up to £1,000 in income from savings tax-free. This falls to £500 if you are a higher rate (40%) taxpayer.

After this point, it can be worth putting your money into an Individual Savings Account (ISA). As a UK resident, there are four main ISA options available: cash ISAs, stocks & shares ISAs, junior ISAs and Lifetime ISAs.

All ISAs are tax-free on all interest or capital gains made, so they can be a great way to build your savings and have security in your future.

Those eligible for the Lifetime ISA even get bonus money from the government! In the UK you have a combined ISA savings limit of £20,000 which you can split between different ISA options.

If you’re not sure which ISA type is for you, our article can help explain the key differences.

If you can't pay in all the money you'd like to invest annually in one go, try creating a monthly savings plan to regularly deposit into your ISA account.

Annual pension allowance

Investing money in your pension before the end of the tax year (April - April) can maximise contributions and give you 20% tax relief for basic rate taxpayers or 40% for higher rate taxpayers. Typically, your pension fund will grow tax-free, so it’s a great place to put money aside for your financial future. You can pay up to £40,000 into your pension pot tax-free this financial year (some higher earners may have a lower limit).

Gifting money tax-efficiently

Inheritance tax is due on estates valued over £325,000, though if you have children you can claim an additional allowance of £175,000 (in tax year 2020/21) to offset the sale of a family home on death. To reduce potential future inheritance tax, you can gift money to loved ones in your lifetime tax-free by utilising the £3,000 annual “gift allowance".

Capital Gains Tax Allowance

Capital Gains Tax (CGT) is charged on the profit you make if you sell or transfer assets. You only need to pay tax on the gains made above your annual tax-free CGT allowance, which is currently set at £12,300 (tax year 2020/21). It cannot be rolled over to a future year.

Tax allowance and ISA limits are regularly reviewed, any figures quoted are accurate at the time of publication.