I filed my tax return recently and I had a tax bill as a result of my savings income. Is there anything I can do to reduce my tax bill next year? Mrs A, Hastings
Using an Individual Savings Account (ISA) is a method of reducing your tax liability as any interest earnt is tax free, resulting in you keeping the interest that you receive.
Accordingly, any income earnt in this account would not be included on your tax return, thus reducing your level of savings income. From April 2016, the government introduced a new savings allowance which allows basic rate taxpayers to earn up to £1,000 savings income tax-free, which is in addition to your interest earnt from ISAs.
The ISA limit for the current tax year 2016/17 is £15,240, which allows individuals to invest funds up to this amount into either a Cash ISA, Stocks and Shares ISA or Innovative Finance ISA. In order to open an ISA you must be at least 16 years of age for a Cash ISA (18 for the other types of ISA) and resident in the UK. In order to benefit from such an account in this tax year, funds must be deposited before 5 April 2017.
From April 2017, a new Lifetime ISA is being launched which is designed to help those aged between 18 and 40 to save for a new home or their retirement.
The scheme provides a bonus of 25% on the yearly savings of up to £4,000 until the saver’s 50th birthday. This could mean an additional £1,000 for every £4,000 saved annually from the age of 18 to 50. This bonus will be paid annually at the end of each tax year.
The funds can be withdrawn tax-free to purchase a first home worth up to £450,000, or withdrawn after the saver’s 60th birthday. The money can be withdrawn earlier for other purposes but the government bonus will be lost and a 5% penalty applied.
Contributions to the new Lifetime ISA will be a part of the overall ISA annual contribution limit, which is set to increase from April 2017 to £20,000 for the 2017/18 tax year.
If you would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on this matter in addition to other tax, accountancy and business matters.
Contact Martin Copland (pictured) on 01424 720222 or email him at firstname.lastname@example.org.