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Five ways to avoid savings interest tax

Five ways to avoid savings interest tax

July 10, 2024 Lauren Bailey Comments Off

Five ways to avoid savings interest tax as a 45p additional rate taxpayer


As a 45p additional rate taxpayer, managing your savings to minimize tax on interest can be challenging but possible with strategic planning.

Here are five tips to help you avoid savings interest tax:


  1. Utilize ISAs (Individual Savings Accounts):

    • ISAs offer tax-free interest: The interest earned on savings within ISAs is exempt from income tax, regardless of your tax bracket.
    • Annual ISA allowance: For the 2023/24 tax year, the allowance is £20,000. You can split this between Cash ISAs, Stocks and Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs according to your preferences.


  1. Invest in National Savings and Investments (NS&I) products:

    • Premium Bonds: The interest is distributed as tax-free prizes, which aren’t considered income when it comes to savings interest tax
    • Other NS&I products: Some products, like certain savings certificates, offer tax-free interest or index-linked returns.


  1. Consider tax-efficient investments:

    • Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS): These schemes offer significant tax advantages, including income tax relief and capital gains tax exemptions, though they involve higher risk.
    • Venture Capital Trusts (VCTs): Investments in VCTs offer income tax relief and tax-free dividends, but like EIS and SEIS, they come with higher risk.


  1. Utilize your spouse’s tax allowances:

    • Spousal transfers: If your spouse is in a lower tax bracket, consider transferring savings or investments to them. This way, the interest might be taxed at a lower rate or could even be tax-free if they are within their personal savings allowance.


  1. Maximize pension contributions:

    • Tax relief on contributions: Contributions to your pension can reduce your taxable income, potentially lowering your overall tax rate. Pension funds also grow tax-free, and you can take a tax-free lump sum upon retirement (up to 25% of the fund).
    • Salary sacrifice schemes: These arrangements can further reduce your taxable income, providing more tax-efficient ways to save for retirement.


By employing these strategies, you can significantly reduce the amount of tax you pay on your savings interest, helping you retain more of your income. However, it’s often beneficial to consult with a financial advisor to tailor these strategies to your specific circumstances and ensure compliance with current tax regulations.


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