Tax and interest rates when looking for savings accounts
When looking to invest in savings accounts, the tax you pay will vary and will depend on the type of option you choose.
Many deals have different levels of tax - the lower the rate you have to pay will depend on other terms of the account.
When taking out an ISA (individual savings account) there is a yearly tax free limit. This is the amount you can invest each year without having to pay any tax on your savings.
The year is classed as the financial year, which always runs from the beginning of April to the beginning of April the next year. This tax free allowance makes saving your money easier as you will not be penalised when saving smaller amounts of cash. There are two kinds of ISA - a mini ISA, otherwise known as a cash ISA, and a stocks and shares ISA.
With a stocks and shares option you can invest more of your money under the tax-free allowance, but you will have to place some of this into stocks and shares, which increases the risk level on your account as not all of it is sitting with your chosen provider in cash. The limit for a stocks and shares ISA is £10,680. A cash ISA, meanwhile, leaves your investment in cash and is easily accessible, although your tax-free limit is less compared to a stocks and shares deal at £5,340 per tax year.
Although ISAs are a popular option with savers because of the tax-free allowance and their availability to access investments quickly and easily, they do have a downside. The interest that you earn on your can be lower and they do not usually provide the best savings rates when compared with other savings accounts. Because of the flexibility that is offered with an ISA, it is not in the best interest of the providers to offer high interest, tax-free savings if you could close your account at any time. This is likely to return less of a profit, if any, to the bank, building society or other financial provider.
Other savings deals offer higher interest and looking for the best savings rates is much easier with bonds or other accounts. The tax free limit on these will differ from provider to provider and you will generally earn more interest. The one major difference of these deals is that with the best savings rates you tend to have to keep your money in an account for a fixed term. Always read the terms and conditions of any savings deal and ensure you are happy with the terms before investing.