Laura Howard, Monday April 07, 2008
You can keep more of your savings out of the taxman's hands than ever before - we show you how to build a tax-free nest egg for the coming year
The start of a new tax year is always good news when it comes to sheltering your hard-earned savings from the taxman. From 6 April, savers will have a fresh allowance with which to open a new Individual Savings Account (Isa) or replenish their existing one. Either way, no tax will be payable on the interest earned.
Even better news is that 2008 is the ideal year to save. In the aftermath of the credit crunch, lenders have withdrawn the best offers on mortgages and loans and turned their attention to taking savings instead as they attempt to realign the balance sheets for tougher times ahead. This competition is resulting in historically high rates of interest on Cash Isas - as well as a renewed interest in sheltering from the credit crunch by investing in stocks and shares.
This tax year brings with it even further good news in the form of fundamental changes to the way the Isa regime works. Firstly, the government has increased the maximum allowance you can save into a tax-free Isa to £7,200. A maximum of £3,600 of this annual allowance can be saved in cash, while the remainder can be invested into a Stocks and Shares Isa. Alternatively, you can choose to save less in cash and more in stocks and shares - or invest the entire £7,200 into a Stocks and Shares Isa.
The former 'mini' and 'maxi' Isa terms have also been scrapped which saves a wealth of confusion. From this tax year, there will be just two types of Isa in which an individual can spend their boosted £7,200 allowance - Cash Isas and Stocks and Shares Isas.
Another change from 6 April is that savers will be able to switch balances held in Cash Isas into a Stocks and Shares Isa, making it easier to boost your exposure to the stock market. However, you can't transfer the money back to the Cash Isa in any one tax year.
The favourable times and terms have generated a boom in activity this Isa season. For example, in January this year £719m was deposited into Cash Isas according to the Building Societies Association (BSA) - this is over double the £302m deposited in January 2007.
Find the best home for your savings
The best rate on any 'no strings' Cash Isa today, according to data provider Moneyfacts, is courtesy of Birmingham Midshires. For a minimum investment of £1,000, it offers 6.35% interest and instant access to your money. Assuming you invested the maximum £3,600 cash on day one, left it in the account for a year and the rate of interest did not change, this would generate £228.60 in tax-free interest by next April.
However, this sum is paid in one go at the end of the year, meaning it is not compounded (when interest becomes payable on interest). In this case, Barclays' Tax Haven Isa, which can be opened with £1 but only pays 6.31%, is actually a better option. As this Isa pays interest monthly - and therefore pays on interest already earned - you would end up more than £6 richer earning £234 by the end of this tax year.
However, if you leave the balance in your Isa and top it up each year, you can always benefit from annual compound interest. A saver who had put away the maximum allowance in a typical Cash Isa every year since their inception in 1999 would now be sitting on £26,585.59 according to data analyst Lipper Hindsight.
Stocks and shares deals
Taking a Stocks and shares Isa is also appealing to consumers, according to new research.
Barclays Stockbrokers found that 63% of investors plan to invest in a Stocks and Shares Isa during
the next tax year despite recent volatility in the financial markets. Their director Tom Ryan said
this was because people were looking at returns on a long-term basis.
However, if you want to take full control of the stocks and shares your Isa is invested in, you will need a self-select Stocks and Shares Isa - and choosing which funds will be a matter of attitude to risk.
In uncertain economic times, Nick Raynor, investment adviser at The Share Centre, said that a 'drip-feed' approach of gradually investing money in stocks and shares is the best way forward. He highlights Tesco, National Grid and Land Securities as three examples of stocks that could appeal to more cautious investors. For pure performance, advisers are tipping Asian equities as the best asset of 2008 according to new poll from James Hay.
