If you want to save money on hidden taxes, now is a great time to take action. UK households with less than £20,000 in savings are being encouraged to use a special type of savings account that can help protect their money.
This comes as financial experts warn that the cost of living crisis is not improving anytime soon. Instead, things are expected to get even tougher, with rising bills and increasing inflation, according to reports from the Bank of England.
Many UK households are looking for ways to secure their savings and avoid unnecessary tax payments. One of the most popular ways to do this is by using a tax-free Individual Savings Account, also known as an ISA.
An ISA is a savings or investment account that allows people to set aside money without paying tax on the interest or returns they earn.
This makes it a great option for people looking to save for big financial goals like buying a first home, investing for the future, or building a retirement fund.
Each tax year, which runs from April 6 to April 5, you can save up to £20,000 in an ISA. You can keep this money in one account or spread it across multiple ISAs. Right now, around eight million people are using ISAs to make the most of their money.
However, there are concerns that the government may remove the tax-free benefit for cash ISAs in the future. This has led financial experts to advise people to take advantage of the benefits now before any changes are made.
An ISA is not just a regular savings account. It can also help protect people from different types of hidden taxes. If you receive shares through a company scheme, you might have to pay capital gains tax when you sell them. However, if you transfer up to £20,000 worth of shares into an ISA within 90 days, you won’t have to pay that tax.
Parents who save money for their children using a bare trust could also benefit from an ISA. A bare trust allows parents or guardians to hold assets for a child until they turn 18.
But when the child reaches adulthood, they could face a big tax bill if the savings have grown significantly. Moving the money into an ISA can help protect them from this.
ISAs can also help people reduce inheritance tax. Some types of ISAs, such as Alternative Investment Market (AIM) ISAs, may be free from inheritance tax after two years. This means parents can use an ISA to protect their money from high tax rates and even save on childcare costs in some cases.
High earners in the UK may also benefit from using an ISA. If someone earns over £100,000 a year, their tax-free personal allowance starts to reduce.
This means they could end up paying more tax and losing valuable allowances. By putting their savings into an ISA, they can prevent this from happening and avoid being hit with a 60 percent tax rate.
Parents who receive Child Benefit payments can also use an ISA to reduce their tax bill. If a parent earns more than £50,000, they have to pay a special tax charge on their Child Benefit.
By putting their savings into an ISA, their taxable income goes down, meaning they may be able to keep more of their benefits instead of losing them to tax.
Since money saved in an ISA is not subject to capital gains or income tax, it is a smart way to keep more of what you earn and avoid unnecessary deductions.
With inflation rising and financial pressures growing, experts believe now is the best time to start using an ISA before potential changes are made to the tax-free benefits.
