Whether you're saving for a home, a new car, a rainy day or some other reason, putting some money aside on a regular basis is often a good idea. But it's not always a straightforward process, as there are many different types of accounts to choose from and lots of jargon to decipher.
What's clear to me though is that every saver should start by considering an ISA( Individual Savings Account ). This is because interest earned from an ordinary (non-ISA) savings account is taxed at your income tax rate. So normally that means your interest is taxed at 20 per cent but could go as high as 40 or even 45 per cent depending on how much your earn.
In contrast, ISAs provide savers with a personal savings allowance that the tax man can't touch - so you get to keep every bit of interest you earn.
The 'New ISA'
One of the most common questions I come across regarding ISAs is about understanding the rules, so I'm going to do my best to share with you what you need to know!
From 1st July 2014, you can save up to £15,000 tax-free in an ISA in cash and/or stocks and shares in any combination you choose.
But remember - you can't replace any money you've withdrawn in the same tax year (from 6th April of one year to 5th April the following year), meaning you can't pay in more than the annual ISA limit in a tax year, even if you make a withdrawal. For example, if you pay in £15,000 during the tax year you will have used your ISA allowance, if you decide to withdraw £1,000, you wouldn't be able to pay in any additional money until the next tax year.
It's a long term game
Although interest rates are historically low at the moment, it's still really important to think about the long term health of finances.
Research from TSB shows one-in-five say they're put off from saving because rates are perceived to be too low. However saving regularly now will help you build up a nice nest egg for the future, allowing you to earn tax-free interest on a bigger amount if interest rates increase in the future. Of course investing the full £15,000 is not easy, but saving a little and often will really add up over time.
If you're lucky enough to be able to save the maximum limit over the next seven years, you could build a balance of £110,309 generating interest of £7,119. If everyone saved this, Brits could earn £342 billion in interest, which, if laid out in £1 coins, would stretch around the world 192 times!
More information - how TSB can help
There's lots of ways you can pay into your ISA, in-branch, over the phone or through internet banking. TSB allows you to top up your ISA as and when you choose to.
For further information:
- TSB research based on a Vision Critical survey of a representative UK sample of 2,005 UK adults polled on the 17th March 2014.
- [Number of UK adults over the age of 20 according to 2011 census 2011 census: 48, 085, 000] multiplied by [Interest earned when customers invest £15,000 every year for seven years at an average interest rate of 1.64% (£7,119)] = £342,317,115,000
The tax advantages depend on your individual circumstances and the tax treatment of your ISA may change in the future.