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Tax-efficient savings update

Newsletter issue - June 2020.

As the new tax year progresses, now is a good time review some of the tax-efficient savings incentives available which may help maximise potential returns.

Help-to-save

The Help-to-Save scheme offers working people on low incomes a 50% bonus, rewarding savers with 50p for every £1 saved. Over four years, a maximum bonus of £1,200 is available on savings of up to £2,400. Savings limits are flexible and it is not necessary to pay in every month to get a bonus.

How much is saved and when is up to the account holder - the rules stipulate that investors can save between £1 and £50 every calendar month, up to a maximum of £2,400 over a four-year period.

Accounts last for forty eight months from the date the account is opened and the government bonuses are added at the halfway point, i.e. after two years, and at the end of the four year lifespan of the account, or on the date that the individual becomes terminally ill or dies, if earlier.

Accounts will be available to open up until September 2023.

The investment limits mean that £2,400 is the maximum an individual can save, with a maximum government bonus payable of £1,200. In comparison, high street banks are currently offering a typical interest rate of between 1 and 2% on savings bonds, which does appear to make the Help-to-Save account a particularly attractive option for someone looking to save.

ISAs and Junior ISAs

The maximum annual investment limit for Individual Savings Accounts (ISAs) remains at £20,000 for 2020/21. The limit effectively allows a couple to save a not-insignificant £40,000 a year and receive interest on the investment tax free. There will also be no capital gains tax to pay when the account is closed.

Junior ISAs are available to UK-resident children under-18 and run on similar lines to 'adult' ISAs. The maximum investment limit has been significantly increased for 2020/21 to £9,000 (from £4,368 in 2019/20). This increase provides adequate scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren.

Lifetime ISAs

Most individuals aged between 18 and 40 are eligible to open a Lifetime ISA (LISA) and contribute up to £4,000 each year, with the government providing a 25% bonus on contributions at the end of each tax year up to the age of 50. The funds in the account, including the government bonus, may be used to buy a first home worth up to £450,000 at any time from 12 months of opening the account and can be withdrawn from age 60 for any other purpose. Savers are also able to access the funds in their account if they become terminally ill. Under the normal rules, any other withdrawals that are made will be subject to a 25% charge. However, to help with the impact of the coronavirus (COVID-19) outbreak, the Government has confirmed that the charge for unauthorised withdrawals from a LISA during the period 6 March 2020 to 5 April 2021 inclusive has been reduced from 25% to 20%. Further details on this announcement can be found in HMRC's Policy Paper of 14 May 2020.

Premium Bonds

With a return rate comparable with regular savings accounts (currently 1.40%), Premium Bonds (PBs) remain one of Britain's most popular ways to save. Currently the minimum amount of PBs that can be purchased is £25 and the maximum that may be held is £50,000. It is now permissible for anyone over the age of 16 to buy PBs on behalf of children. The odds on winning a prize in any one month are currently 24,500 to one. There are currently two £1m prizes, five £100,000 prizes and ten £50,000 prizes each month.

Although Premium Bonds are not strictly an 'investment', they can be encashed at any time with the full amount of invested capital being returned - and in the meantime, any returns by way of 'winnings' will be tax-free.