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What Are the Most Tax-Efficient Savings and Investments in the UK?

19 February, 2021

Tax rates change all the time, and our previous article shows how Brexit and COVID-19 have impacted most of the tax rate changes recently. The OECD has even released guidelines to help taxpayers report financial periods that have been impacted by the pandemic, and tax administrations in applying revised pricing policies. It's important to take note of how these changes affect you - not only in terms of your income, but in terms of investments as well. Some investments garner higher tax rates than others, and it's important to understand how much you should be paying and how often. This helps you stay in good standing with the HMRC, and allows you to make the most of your investments too. That said, here are the most tax-efficient savings and investments in the UK right now:

Individual Savings Account (ISA)

An ISA is a tax-free savings account. And in a guide to ISAs by EQi, they show the many benefits you can get from opening this type of savings account. This includes not having to pay capital gains tax on profits made in the account, and having a personal savings allowance and interest on fixed interest investments. When you complete a tax return, you don't have to declare any interest on your ISA, income, or capital gains. As a result, you can save up to USD 20,000 in your ISA in a single tax year. From 2018, there were about 11.2 million people with cash ISAs, and at least 2.2 million investors in the UK who held stocks and shares ISAs.

Junior Individual Savings Account (Junior ISA)

Junior ISAs are tax-free savings accounts for children under 18. Financial Times' discussion on Junior ISAs explains that, although the account belongs to the child, it will be the parents' responsibility to open and manage the account. Of course, grandparents and friends are allowed to help fund it, too. However, it's important to note that the savings limit for this account is capped at USD 9,000. On the upside, the child will be able to control the account personally once they turn 16. But it is only once they turn 18 that they'll be able to use the money however they like. There's also a loophole for 16 and 17-year-olds: they can open an adult cash ISA while still keeping their Junior ISA, thus getting access to two separate savings accounts.

Private Pension Contributions

A pension is essentially an investment where you and your employer can chip in to save up for your retirement. There are minimum contribution levels, but you should consider contributing more if you can afford it. An article on pensions by The Telegraph shows how the average UK pension pot is USD 61,897 - assuming you have spent your lifetime saving up for it. Plus, private pension contributions can be tax-free, but only up to a certain amount. But if you're not registered for tax relief with HMRC or your pension pot is not invested according to HMRC rules, it may still be taxed.

Peer-to-Peer Lending

Peer-to-peer lending is essentially lending to people or businesses without using a bank. Instead, they operate through lending platforms online. But before using any of these platforms, make sure that they are regulated and authorised by the Financial Conduct Authority (FCA). According to Gov.uk, this kind of investment can generate higher interest rates than what you could have earned from financial institutions. Just like any other interest, the interest received from peer-to-peer lending is taxable. However, tax relief is available under some situations. For instance, when you make loans through lending platforms authorised by the FCA, or you are the legal lender when a loan has gone bad.


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