How to save or invest money tax-free

Saving and investing money is a way to encourage good financial practice and could provide peace of mind for any financial burdens – both expected and unexpected – that you may encounter in the future. Putting something aside regularly can help you prepare you for those big costs: towards your children’s education, medical expenses or even that post-retirement round-the-world trip you’ve been planning!

When you’re trying to save or invest, you’ve got enough to worry about without the taxman taking a chunk of your money. While tax is an important part of our financial system there are ways in which you can save and invest money and benefit from significant tax incentives.

Many savings and investment plans allow you to generate interest and returns exempt from tax – but it can be difficult selecting the right product for you. Take time to familiarise yourself, not only with the different plans on the market, but how each one will function over the short and long term.
Tax free means, under current law, free of income and capital gains tax except for tax on dividends from UK shares. Be aware that tax treatment depends on individual circumstances and tax law may change in the future. You must remember that with any stockmarket related investments, your investments may fall as well as rise and you could get back less than you have paid in.

Tax Free Savings and Investment Plans

You’ll find a variety of tax-free savings and investment plans on offer: each carries its own benefits and drawbacks. Most will require you to invest money regularly over a predetermined period of time (usually over ten years) – and in return, attempt to generate potential long-term growth and provide a tax-free lump sum at the end of that period.

Individual Savings Accounts (ISAs)

Individual Savings Accounts are a popular way of allowing your money to grow within a tax-free wrapper. Depending on your requirements and needs, you may take out a ‘cash’ or Stocks and Shares ISA or hold both simultaneously subject to the annual subscription limit. For the 2011/12-tax year the limit stands at £10,680 and up to £5,340 can be invested in a cash ISA.

Family Savings Plans

Saving and investing money doesn’t just have to be for you – you can get your whole family involved in preparing for the future with products designed specifically for families and plans that allow you to make investments for children. The tax-protection these plans offer often comes in addition to the allowances of any other tax-free plans (such as the ISA) you or other members of the family hold.

Get the Most from Your Savings or Investment Plan

Keep certain factors in mind before you choose a savings or investment plan…

  • Subscription Limits: make sure you understand how much the savings or investment plan you’ve chosen allows you to put aside at any given time. Most savings or investment plans involve monthly contributions so it’s worth planning ahead. The ISA involves an annual subscription limit, which stands, at present, at £10,680 per tax year. You may share this amount over both a cash (up to £5,340 can be invested in a cash ISA) and stocks and shares ISA.
  • Long-term investment: think about what your savings and investment goals are. Most savings or investment plans should be considered long-term strategies, which deliver their full potential over a pre-arranged period of time.
  • Access: find out what kind of access you’ll be allowed to your money. While ISAs may allow a certain level of access, most tax-free savings and investment plans require you leave your money until the end of the plan or risk losing the tax benefits.

On a final note, it can be a good idea to use any kind of savings or investment plan to develop a regular savings habit. If you’re putting money aside regularly, you may find that the process quickly becomes a habit and can be a great way to get the most out of your tax-free savings and investment allowance. It’s never too early to begin investing for the future!

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly. No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting Advisers may charge for providing such advice and should confirm any cost beforehand.