According to the Office for National Statistics, in 2023 to 2024 it has been estimated that almost 6.5 million people are paying higher or additional rate tax, a figure that has risen year on year and will likely continue in this fashion. This is mainly due to the 5-year freeze on allowances announced in the Budget 2021 and was extended for a further two years until April 2028 following the updates in the 2022 Autumn Statement.

Added to this, the Chancellor announced in the Spring Budget of 2023, that the amount you can earn before paying additional rate tax would be lowered, from £150,000 to £125,140 from April 2023, meaning even more people are dragged into the highest income tax bracket. Furthermore, the annual Capital Gains Tax exemption has fallen from £6,000 to £3,000 per person, per year and the tax-free Dividend allowance has fallen from £1,000 to £500. This creates a larger tax burden on all individuals and impacts the amount of tax planning each person should undertake.

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Tax can have a big impact on your ability to preserve the value of your savings and investments in retirement. As such, one of the main focuses when advising clients, is creating a plan that helps them achieve their objectives in the most tax efficient manner. There are several ways to reduce the tax you pay on your annual income, especially if you’re in the higher or additional rate tax bracket.

What are the main taxes?

Income tax

Income tax is a tax imposed directly on your personal income. In simple terms, income tax is the tax on your earnings and is paid at 0% - 45% dependent on which of the income tax brackets you fall into.

Once your earnings exceed your personal allowance, you are required to pay tax on the following sources of income:

1. Income from employment
2. Income from pension
3. Interest on savings
4. Rental income
5. Employment benefits
6. Income from a trust

Capital Gains Tax

Capital gains tax is a tax on the profit made when you dispose of an asset such as an investment in an unwrapped environment (for example a direct share or general investment account) or any properties (other than the main residence).

The amount of capital gains tax you would pay on stocks and shares depends on the tax bracket the gains fall into when added on top of the income with any gains being taxed at either 10% (basic rate) or 20% (higher/additional rate), after taking into account the newly reduced (tax year 2024/25) capital gains tax allowance of £3,000. For the sale of property outside the main residence, the gains are taxed either 18% (basic rate) or 24% (higher/additional rate).

Inheritance Tax

Inheritance tax is a tax levied on any possession that falls in the individual's estate upon death. This tax can also apply to gifts made while the individual was still alive.

Inheritance tax is typically set at 40%, but if at least 10% of your estate is left to charity, the tax rate reduces to 36%.

An individual can leave up to a total of £325,000 (comprising of money, property, and possessions) without incurring inheritance tax. Additionally, an extra £175,000 allowance may apply if the main residence is passed on to direct descendants.

Why is tax planning important?

Tax planning involves minimising tax liabilities by utilising allowances, exclusions, exemptions and deductions to reduce owed taxes, so it should be an essential part of an individual’s financial plan.

Effective tax planning can be instrumental in savings individuals' money, maximising wealth and attaining your financial goals. By proactively managing finances, optimising tax liabilities and enhancing your overall financial wellbeing, individuals can ensure they are on track to meet their objectives.

What is higher rate tax?

In the UK, we do not get taxed on the first £12,570 we earn from our salary, bonuses, rental income, pensions, and other various income types - this is called our Personal Allowance. Income exceeding the Personal Allowance is then subject to income tax. This is banded so:

• Your earnings between £12,570 and £50,270 are currently taxed at the basic rate of 20%.
• Earnings from £50,271 and £125,140 at the higher rate of 40%.
• Anything above £125,140 is taxed at an additional rate of 45%.

The personal allowance and the higher rate threshold (£50,270) have been frozen until 2028 following an announcement by the Chancellor in the Autumn Statement 2022.

Although the rate of inflation is decreasing month on month, currently standing at 2.30% in June 2024, we have seen rates over the past year far exceeding the Bank of England’s 2% target rate, resulting in an increase for wages for individuals across the UK. Therefore, more people are and will continue to join the population previously pulled into paying 40%-45% tax on their earnings, so it is increasingly important we utilise the tax planning opportunities available to us to minimise the impact of the frozen tax allowances and tax bands.

Ways to reduce your income tax bill

There are a few ways in which you can negate the impact that your income tax bill can have. Broadly, they are as follows:

Contribute to your pension

Contributions to a pension are usually made from taxed money (unless in a 'net pay' scheme). However, when you pay in, you will pay the “net” amount (80% for a basic rate taxpayer). The government will then make up the tax paid on the amount contributed, effectively making the contribution itself, tax-free.
For example, if you’re a basic rate taxpayer you can receive tax relief of 20% from the government, therefore it costs you 80p to make a £1 pension contribution.

Contribute to your pension via salary sacrifice

You can ask your employer to enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax (or various rates depending on the tax bands the income falls into after the sacrifice), along with also providing valuable National Insurance savings. This can become quite complicated, and more details can be found on the government website.

A notable additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

Make full use of your annual allowance

The great news is the Government have increased the amount that you can contribute into a pension each year, without suffering a tax charge. The maximum annual allowance has risen from £40,000 to £60,000, implemented at the beginning of the 2023/24 tax year. 
If you are not subject to tapering of your annual allowance and you have not utilised your full allowance of £60,000, then you could consider making use of the full allowance from a personal contribution, or carrying-forward unused annual allowance from previous years. Please note, however, this can only be done up to a maximum of the three previous tax years and personal tax-relievable contributions are capped at 100% relevant UK earnings regardless of the amount of unused annual allowance.

Up to 60% tax relief available when you invest in a Pension

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

For those earning between £100,000 and £125,140 you could be in the 60% tax trap. But this also presents an opportunity when it comes to saving for retirement. If you have taxable income in this range, you can effectively receive income tax relief of 60% on your pension contributions as this is the marginal rate of tax paid on earnings within this band. This is due to the impact of your personal tax allowance of £12,570 being reduced by £1 for every £2 you earn over £100,000 meaning the allowance is reduced to zero when your income reaches £125,140. A pension contribution within this band of earnings effectively reclaims part, or all, of your personal allowance thus increasing the rate of tax relief to 60%.

How to avoid the High Income Child Benefit Charge

An individual can receive Child Benefit if they are responsible for raising a child who is either under 16 or under 20 if they stay in approved education or training. There are two rates at which it is paid; for the first/eldest child, you will receive £25.60 per week and for any additional children, you will receive £16.95 per week per child.
If you are a couple claiming Child Benefit, where one or both individuals have an income above £60,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’.
The tax charge is calculated through the tax return on any partner whose income is more than £60,000 a year. In the event that both partners have incomes over £60,000, the charge will apply to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income, meaning that the Child Benefit is completely removed when income reaches £80,000.
One way you may avoid the tax charge is if a personal pension contribution is made, as the adjusted net income used by HMRC will reduce. If the contribution is enough to reduce this to below £60,000, the High Income Child Benefit tax charge will be avoided.

The benefits of charitable giving

Giving to charity is not only good for the cause receiving your donations but is also beneficial to your annual tax bill. If you keep a record of your donations, you will be entitled to report these on your tax return.

The most common way to donate to a UK registered charity or community amateur sport clubs (CASCs) is through Gift Aid. Gift Aid can only be claimed by UK taxpayers and is effectively the repayment of basic rate tax on the donation. This is not repaid to the donor but is given to the charity as they can claim an additional 25p for every £1 they receive.

If you are a higher (40%) or additional rate (45%) taxpayer, you are able to claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation. An example of this is shown below:

If you make a charitable gift of £100, the charity will be able to receive £25 from HMRC to reclaim the basic rate tax. As a higher/additional rate taxpayer, you can then claim a further £25 (higher) or £31.25 (additional) relief back via your self-assessment for the £125 (gross) contribution you originally made. To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question. More information can be found here.

And not forgetting, charitable giving is a great way to lower your loved one's inheritance tax bill.

Tax relief schemes and other allowances

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief on the amount you invest, for SEIS this increases to 50% relief. This 30% or 50% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.
These investments were created by the government, as an initiative designed to help small and medium sized companies raise finance by offering tax benefits to investors. Given the type of companies they invest in, they are perceived to be high-risk investments.
They can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher and additional rate tax band.

But, as higher risk investments they are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

How we can help

There are a number of actions that can be taken to reduce the amount of income tax you pay, which are especially beneficial if you fall into the higher or additional rate tax bands. These tax efficiencies are built into our financial plans, and we actively help clients maximise their allowances and income so they can achieve their goals throughout their lives. If you would like to find out more about how The Private Office can help you with personalised tax efficient financial plans, please enquire for a free initial consultation with one of our Independent Financial Advisers.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The content in this article is for information only and does not constitute individual financial advice.

A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. 

Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. 

The Financial Conduct Authority (FCA) does not regulate tax planning or advice.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

In an uncharacteristically under-the-radar move, National Savings & Investments (NS&I) increased the rates on its easy access Direct Saver and Income Bonds accounts – up from 3.65% to 4% AER on 23rd May 2024.

In addition, the state-owned bank also launched a 1-year version of its British Savings Bond on the same day, offering 4.50% AER for the growth bond and 4.41% gross/4.50%AER for the monthly income version.

The reason that these rate changes almost passed us by is because they occurred the day after the date of the upcoming General Election was announced. Therefore, due to what is known as purdah, NS&I – as a government department - is not allowed to make any public announcements in the pre-election period, in case it influences voters.

Why have we seen these increases?

In the Spring Budget 2024, it was announced that the NS&I net financing target for 2024/25 has been increased from £7.5 billion in 2023/24, (+ or - £3 billion either way), to £9 billion, with a leeway of £4 billion either way.

This target is the amount of money NS&I is tasked to raise for the Government, allowing for any money that might also be withdrawn. So, they need to be mindful that they are being asked to raise a little more this year.

However, a modest interest rate rise of this level is likely to maintain balances rather than attract new business, which is probably what they are looking to achieve for the time being, as the forecast for the net amount raised in 2023/24 is set to be £10.9 billion – a little over the excess target. This is probably due, in the main, to the launch of a market leading 1-year Guaranteed Income and Growth Bond paying 6.20% at the end of August last year, when nearly a quarter of a million savers deposited an extraordinary £7.7 billion in five weeks!

So how do these rates stack up?

1-year British Savings Bond

As we highlighted when the 3-year version of this bond was launched a couple of months ago, while these have been called British Savings Bonds, they are actually re-issuances of the NS&I Guaranteed Growth and Guaranteed Income Bonds, as opposed to anything new.

And as with the 3-year offering, although it’s not paying a rock bottom price, it is far from market-leading. In fact, over 62% of the 1-year fixed rate bonds currently available are paying more than 4.50% AER.

At the time of writing, the top 1-year bond from the whole of the market, is paying 5.22% (National Bank of Egypt UK Ltd, via the Raisin cash platform). Savers new to Raisin could also benefit from a new welcome bonus of £50 when they open and fund an account on the platform for the first time.

However, if you are looking to deposit a large sum for a year, this British Bond might be of interest as the maximum deposit is £1m and HM Treasury protects all cash held in NS&I accounts – the protection is not restricted to £85,000 as with the Financial Services Compensation Scheme (FSCS).

Direct Saver and Income Bonds

These are both easy access accounts and pay the same AER rate, however the key difference is that the Income Bonds account pays the interest out monthly at a rate of 3.93%; there is no way to roll it over, whilst the Direct Saver pays the interest annually and this can either be paid away or rolled over and compounded.

This new rate of 4% AER is not market-leading either – more than 80 other easy access accounts pay a higher rate! But it’s far more than the high street banks so should still be popular, especially given that you can deposit up to £1million into the Income Bonds account and up to £2 million in the Direct Saver. And remember, it is all protected by HM Treasury – so a great option for those with more than £85,000 that needs an accessible home but don’t want to open multiple accounts in order to keep all money protected under the FSCS.

NS&I will be hoping to keep net outflows down with these rate moves, as it’s unlikely that we’ll see any more changes ahead until the election. The rate increases would have already been on the cards and no doubt there would have been more of a fanfare of the election date announcement hadn’t scuppered their plans!

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate cash flow planning.

Even though interest rates have soared over the last few years, it’s staggering to see that there is still over £253 billion sitting in current accounts and savings accounts that are earning nothing, according to the latest figures from the Bank of England. It has fallen a little bit, from over £270 billion this time last year, but it’s still a significant sum and as a result, UK savers are missing out. This is particularly concerning when you could earn as much as 5% if you were to switch to some of the best savings accounts on the market.

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It's a wake-up call for everyone to reassess their savings strategy. With high inflation eroding the value of money over the last couple of years in particular, allowing such a significant amount to languish in zero-interest accounts is like throwing money away. Savers could be earning substantial returns by simply moving their funds to more competitive accounts.

For instance, consider the impact of earning a 5% interest rate. On £253 billion, this equates to over £12.65 billion in potential interest earnings every year. This is money that could significantly bolster individual finances, support future plans, and provide a stronger financial safety net. 

And of course earning interest can help to mitigate or even obliterate the damaging effects of inflation. If you are earning less than inflation, then the purchasing power of your cash will not be keeping up with the rising cost of living.

For example, if you have £50,000 in an account earning nothing, with inflation at the current level of 2.3%, after five years, although it would appear that you still have £50,000 in your account, the real value after the effect of inflation would have reduced your spending power to the equivalent of £44,626. However, if you had that cash in an account earning 5%, not only would the total balance have increased to £63,814 after five years, including accrued interest, but more importantly the real value would have grown too – giving you spending power of £56,956, so more than keeping up with inflation.
 

For more information about how inflation may be eroding your savings, take a look at our inflation calculator:

The reluctance to switch accounts often stems from a combination of inertia and lack of awareness. Many are unaware of the competitive rates available, while others might find the process of switching accounts daunting. However, with the advent of online banking and websites such as Savings Champion, it's never been easier to find and switch to a better savings account.
Whilst it’s often the lesser-known cash savings providers that offer the top rates, another reason for the inertia can be ‘worry of the unknown’. But it’s because they are less known, these providers need to work harder to attract new customers which means they offer the most competitive rates. And as long as you check that your money will be protected by the Financial Services Compensation Scheme (FSCS), there is no need to be worried.

Now is the time to act. Review your current savings accounts and the amount you are leaving to languish in your current account - and explore the market for better options. 

The potential gains are too significant to ignore, and the process of switching is simpler than many might think. By making a proactive change, you can stop missing out on the interest your money deserves to earn.

The top rates are listed on the Savings Champion. If you do come across an account that is not listed, check that it isn’t too good to be true by visiting the provider’s website or contacting them directly. Unfortunately, there are scammers out there, but by taking a sensible approach, there is no reason to miss out on earning some meaningful returns.

Remember, every day that your savings sit in a zero-interest account is another day you're missing out on better returns. Take charge of your financial future and ensure your savings are working as hard as you do.

If you are concerned about how inflation may be affecting your savings and investments, why not get in touch and see if we can help. For all those with £100,000 or more in savings, pensions, or investments we are currently offering a free review worth £500. You can request a free non-committal initial consultation with a member of our team or give us a call on 033 323 9065 to get in touch.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).

The Financial Conduct Authority (FCA) does not regulate cash flow planning, 

The latest figures from the Office for National Statistics (ONS) are out, and inflation, as measured by the Consumer Prices Index (CPI) has fallen to the lowest level in almost three years.

Headline inflation came in at 2.3% in the 12 months to April 2024, down from 3.2% the month before, while core inflation declined from 4.2% to 3.9% in the same period.  

The Bank of England has hinted that UK base rate, which has been raised in recent years to slow price rises, could be cut this summer. Base rate is currently at 5.25% - the highest level in 16 years.

Anna Bowes, Co-founder of Savings Champion says “The latest inflation data is out, and the current situation is a savers dream - interest rates have remained pretty stable, while the rising cost of living is slowing! As we know, while inflation may have fallen to 2.3% which is close to the government target, it doesn’t mean that prices are falling, it means that the rate at which costs are rising has slowed. And if you can find a savings account that is going to pay you more than the rate at which your cost of living is going up, that could mean extra pounds in your pockets.” 

Falling inflation does not mean the prices of goods and services overall are coming down, it just means that they are rising at a slower pace.

What is inflation and how is it measured?

Inflation is a measure of how the prices of goods and services have increased over time.  

Goods are tangible items sold to customers, such as food, while services are tasks performed for the benefit of recipients, such as a haircut. Generally, this increase is measured by considering the cost of things today compared to how much they cost a year ago. The average increase between these prices is demonstrated in the inflation rate.  

Rising inflation rates directly affect the cost of living. For example, if the price of a bottle of milk is £1, and inflation is increasing by 5%, then your bottle of milk will cost you 5p more. Or, in other words, the spending power of your money has decreased by 5%.  

Ideally, the Government wants to keep inflation low and stable. The general mandated target for the Bank of England is 2%. Anything significantly above or below this target is thought to cause issues for the economy.  

Beating inflation

Although inflation is falling, it’s important to remember that the prices of goods and services overall are still rising, just at a slower rate than before. For example, services inflation only declined by 0.1% in April, virtually unmoving against the headline inflation decrease. However, there are a number of simple ways that you can mitigate these differences.

“If you have your cash with a high street provider, you are particularly vulnerable. For example, the Barclays Everyday Saver account is paying just 1.66% on the first £10,000 deposited into that account, balances of over £10,000 will earn a diluted return as the amount over £10,000 will earn just 1.26% - well below inflation!  

In the meantime, you could earn up to 5% on the top paying easy access accounts and more if you are happy to tie some of your money up. The top 1-year bond is paying 5.21% whilst the top 5-year bond is paying 4.57%. Whilst the longer term, lower paying bonds look like a poorer proposition at the moment, it makes sense to think longer term too. What happens if interest rates fall sharply over the next few years? You might feel pretty pleased with yourself in a couple of years if you had locked at least some of your cash up for longer, hedging against inflation and interest rate cuts!” - Anna Bowes, Co-founder of Savings Champion. 

With headline inflation and interest rates uncertain, it’s more important than ever to make sure your finances are handled responsibly and with the right guidance. At TPO, we understand the stress surrounding the current economic climate. Our chartered financial advisers are unbiased and completely independent, meaning that they can give whole of market advice, and so are best placed to give you a plan tailored exactly to your personal financial goals.  

If you’d like to know more, request a free non-committal initial consultation with one of our team or give us a call on 0333 323 9065 and get in touch. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The interest rates are correct as of 24th May 2024.

A power of attorney, also known as an LPA (Lasting Power of Attorney) is when you give another individual the legal power to make decisions about your health, welfare, or finances. 

Establishing a power of attorney is a critical part of anybody’s financial plan, because it gives you the peace of mind that someone you trust is in charge of your affairs if it became necessary for them to do so. Life is not linear and unexpected events occur that we are not prepared for; this is why it is better to take pre-emptive steps now to give you this comfort.

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When are powers of attorney used?

There are two main types of Power of Attorney that you should be aware of, which cost £82 each to set up.

A Property and Financial Affairs POA can be used when the donor has capacity, unless the document specifies otherwise. In contrast, however, a Health and Welfare POA can only be in the event that you stop having the mental capacity to do this for yourself. Having mental capacity refers to the cognitive ability to make your own decisions and understand the implications of such decisions coherently.

Property and Financial Affairs

• This gives your attorney the powers to make decisions on all things related to your financial affairs and property. 
• This can range from managing your bank accounts, organising bill payments, paying off debts, or even selling a property.
• Crucially, this type of LPA gives the attorney the powers to act in this capacity immediately, regardless of whether you have lost mental capacity or not. As such, if you do not wish for this to be the case, you must clearly state this when creating the LPA.

Health and Welfare

• This gives your attorney the power to make decisions over your medical care, as well as your daily routine (washing, eating, etc). 
• Your attorney(s) will have the power to decide where you live, whether a care home is appropriate, or indeed whether certain treatments are suitable
• Conversely, this can only be in effect once you lose mental capacity to appropriately act for yourself.

How to set up a Power of Attorney?

The first step in this journey is, of course, deciding on whom you wish your attorney(s) to be. This will need to be someone that you are confident you can trust and will act in your best interest in the event of you losing mental capacity.

You will firstly need to obtain the LPA forms and an information pack from the Office of the Public Guardian. This can be done online through Gov.UK or you can order them by calling 0300 456 0300. The Office of the Public Guardian’s own website has a step-by-step guide to completing the forms correctly, as it’s vital that you do not make any mistakes as this can lead to  the request being rejected. For a fee, a solicitor can help complete the forms.

At this point, you will need to have the LPA signed by a ‘certificate provider’ which is someone that confirms you have not been put under pressure to sign it. This can be someone that you have known for over 2 years, or a professional person (doctor, solicitor). You will then need to sign the completed forms and send them to the Office of the Public Guardian.

How long does power of attorney take to set up?

Once you have completed the steps above, you will then need to register the LPA with the Office of the Public Guardian. Your LPA will not be viable until this registration has been complete. This process can take up to 20 weeks, so please be aware of this when you are considering establishing an LPA. This also adds weight to the argument that you should consider sorting this out now without further delays.

If you do not feel confident in doing this yourself, you may find it easier to use a solicitor so that you know you have gone through the correct process. Please do not hesitate to get in contact with us at The Private Office as we have many professional contacts that we can put you in touch with for this service.

Who can override a power of attorney?

Like many things, you can of course revoke and cancel the power of attorney at anytime. However, you must still have mental capacity to do so. The process will involve you informing both your attorney and the Office of the Public Guardian that you are revoking it so that they can remove the active LPA from the register.

Why obtaining a power of attorney shouldn’t be ignored

Most people are aware that they should have a will in place to organise their affairs when they pass away. However, there is not the same emphasis placed on obtaining an LPA for when you are still alive. A study from Canada Life highlighted that around 77% of over 55s in the UK have not registered any form of LPA, yet around 1 in 14 people over the age of 65 in the UK suffers from dementia. 

It is crucial that this should be viewed as a high priority when you are addressing your personal financial planning. At a cost of £82 (or £164 for both), it is something that is well worth getting organised so that you can have peace of mind that you will be cared for if the worst were to happen.

If you’d like to find out more about how we can help, why not get in touch and speak to one of our expert team for a free initial consultation.

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This article is intended for general information only, it does not constitute individual or legal advice and should not be used to inform financial decisions. 

In essence, the new British Savings Bond is simply a re-issuance of the NS&I 3-year Guaranteed Income and Guaranteed Growth bonds, rather than anything new or British! And the rate they are offering is 4.15% gross/AER for the Guaranteed Growth Bond and 4.07% gross/4.15% AER for the Guaranteed Income Bond.

As was reported just after the budget and as is often the case with NS&I products, whilst the interest rate is not rock bottom, it’s mid table, so is likely to still be popular, especially for those rolling over old bonds, and for those with more than the FSCS limit of £85,000, because of course all cash held with NS&I is guaranteed by HM Treasury.

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At the time of writing, the top 3-year bonds are paying around 4.70% AER. On a deposit of £50,000, you could earn over £1,000 more after three years if you choose a top paying bond.

One thing to be aware of is that if you choose the Guaranteed Growth version of the British Bond, as there is no option to take an income at all, all of the interest earned will count towards your taxable income in the year the bond matures, rather than being spread out over the term of the bond, even though interest is added and compounded each year. With many other bonds, if you at least have the option to choose to have the interest paid out or compounded, the interest is deemed to be paid annually and therefore should be added to your taxable income each year.

The reason this could be significant is because if all the interest is deemed to have been received in one year rather than spread over the term of the bond, it could mean a larger tax bill, as you can’t spread the interest over the term of the bond and therefore utilise the Personal Savings Allowance (PSA) each year.

The PSA was introduced in April 2016 and it means that basic rate taxpayers can earn up to £1,000 per tax year, before they have to pay tax on the interest on their cash savings accounts. The PSA for higher rate taxpayers is £500 and additional rate taxpayers don’t receive a PSA.

However, you cannot roll over any unused PSA, so if you don’t earn £1,000 in savings interest in one year, but you earn more than the allowance in the following year, that’s tough luck. You’ll still owe tax on any interest over the allowance for that individual tax year.

For many customers, this may not have too much of an impact, especially if you are already using your PSA. But it’s important to be aware.

And let’s not forget that for some, it could mean that they are pushed into a higher (or even worse, the highest) tax bracket for that year.

How much more tax could you be paying?

Let me give you an example which assumes the saver is a basic rate taxpayer and has no other savings accounts held elsewhere.

If you deposited £50,000 into the NS&I Guaranteed Growth Bond 3-year term (British Savings Bond), paying 4.15% AER, if the interest is deemed to be paid annually, you would receive gross interest of £2,075 in year one, £2,161.11 in year two (due to the compounding effect of rolling the interest over) and £2,250.80 in the final year, breaching the PSA each year. But if this were spread over the term, in this example you would pay 20% tax on £1,075 in year one, on £1,161.11 in year two and on £1,250.80 in year three – so £697.38 in total.

However, as the interest is counted only in the year of maturity, a total amount of £6,486.91 will be received in one fell swoop. Therefore, tax of 20% is due on the £5,486.91 that exceeds the PSA, so there would be £1,097.38 of tax to pay on your savings– a pretty significant unexpected increase, from £697.38 tax to £1,097.38!

Some savers will be eligible for the starting rate for savings, which means that you can earn an extra £5,000 in interest before it is liable for tax, however this only applies to those whose other income (so wages or pension income for example) does not exceed £17,570.

The majority of fixed rate bonds from banks and building societies do not make their interest payments in this way. If the bond offers the option to either take the interest annually or roll it over, it is likely that the interest is deemed to be received annually, even if it is rolled over.  The top paying 3-year bond that gives savers the option to take an annual (or monthly income) or roll it over is the new 3 Year Fixed Term Savings Account with RCI, paying 4.70% AER.*

Again, assuming the same deposit amount of £50,000 as in the NS&I example above, although the top rate is paying a higher interest rate, a basic rate taxpayer would likely pay less tax, as it is shared over the term of the bond.

On a bond paying 4.70% AER, in year one the interest earned would be £2,350 so the saver would pay 20% on the excess £1,350 which equates to £270, in year two it’s a little bit more interest - £2,460.45 - so the tax due is £292.09 and in year three it’s £2,576.09 interest, with a tax liability of £315.22 - total tax due would be £877.31, which is £220.07 less than the NS&I Guaranteed Growth Bond– even though the interest rate and therefore the gross interest earned is higher. After tax you’d earn £6,509.23 on the RCI bond, versus £5,389.53 on the NS&I bond – more than £1,000 extra.

Please note that these calculations are for illustrative purposes only. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate tax advice. 

The accounts and rates mentioned in this article are accurate and correct as the time of writing 17/04/2024.

Individual Savings Accounts, or more commonly known as ISAs, are one of the most tax-efficient methods of saving and investing and are available to UK residents only.

Any interest, dividends, or capital gains earned within an ISA are usually exempt from income tax and capital gains tax, which hugely benefits individuals in boosting returns on investments compared to holding them in taxable accounts. This is why it’s wise to understand the importance of ISAs and understand how they form a useful tax-efficient element of your holistic financial plan. But what are the different types of ISAs available to you, and what are the benefits they can offer you in differing stages of the financial planning life cycle. ISAs are inherently useful, but used at the wrong time in your life can make them inefficient in achieving your financial goals. Of course, managing your assets is a highly personalised process, and how much you want to allocate to ISAs should reflect your own individual circumstances.

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How much can I invest into an ISA?

The ISA allowance for the current tax year 2024/25 is £20,000, which it has remained at since 2017 when the Government announced plans to freeze this and other allowances until 2026, which was later extended to 2028. You can allocate your entire allowance to one type of ISA or spread it across the different types that we’ll look at shortly. The good news is the new tax year 2024/25 introduced a new rule, where you can open multiple ISAs of the same type with more than one provider in the same tax year, whilst retaining your annual allowance.

The different types of ISAs

Cash ISAs – These are specifically designed for cash savings accounts offered by banks and building societies. Cash ISAs, much like standard taxable savings accounts, come in various forms, including instant access accounts, regular savings accounts, fixed-rate accounts, and variable-rate accounts. This allows individuals to choose the type of account that best suits their savings goals and preferences.  And of course, all interest earned, whilst held in an ISA, is tax free.

If you are interested in exploring what cash ISAs have to offer, please check out the Savings Champion website, which compares the best accounts on the market.

Stocks & Shares ISA – These offer the opportunity to invest your cash into wide range of investments, from individual stocks to collective investment funds. These are well-suited for long-term investing, as they offer the potential for higher returns compared to cash savings. However, as the returns are linked to the performance of the investments, the value of the investment could fall as well as rise.

Lifetime ISA (LISA) – These are designed to help young people save for their first home or retirement and can either be held as cash or investments. To be eligible, you must be aged between 18 and 40 and can contribute a maximum of £4,000 per tax year. To incentivise savers, the Government contributes an additional 25% bonus on your contributions up to a maximum of £1,000 per tax year.

The cut-off date for contributions into this type of ISA is 50 years old, however, your account can stay open, and your cash savings or investments can continue to grow. If you opt to not use your funds to purchase your first home, the earliest you can access the money is at age 60. 

Junior ISA (JISA) – These offer a long-term saving and or investment opportunity for children under 18. They can also be in the form of cash or stocks and shares ISAs. The annual allowance is £9,000 per tax year, and the money cannot be accessed until the child turns 18. Parents or guardians can open a Junior ISA, but the child can take control at age 16 and withdraw money at age 18.

Innovative Finance ISA – This ISA contains peer-to-peer loans instead of cash or stocks and shares ISAs. Peer-to-peer lending matches lenders up with borrowers in return for interest. As banks are not used and money is invested through an online portal, you can potentially earn higher interest rates than a traditional savings account. Please be aware that these are slightly more complex ISA wrappers and are not protected by the Financial Services Compensation Scheme, so the risk of losing money is higher.

A new 'British ISA' was announced in the Spring Budget and is still under consultation. What we know at this point however, it should offer an additional £5,000 tax-free ISA allowance for investments into British companies, and should be in addition to the standard £20,000 ISA allowance which has remained unchanged.

Further details to follow including when this will be available.

Which ISA is right for you?

How to select the best ISA for you will be determined by your individual savings goals, attitude to risk and time horizons to grow your pot. The following scenarios attempt to demonstrate which ISAs might be suitable for individuals at different stages in their life cycle.

For a young individual with a keen interest in building a large asset base to supplement pension income for retirement, a stocks and shares ISA could be a good option, and with a long-time horizon, short-term volatility is less likely to be an issue. This approach could see better returns over the long-term when compared to cash returns over the same time horizon. 

However, those with their eye on retirement in the near future, will most likely want to take a lower risk approach than a stocks and shares ISA. Here, a cash ISA might be a more suitable option to minimise exposure to market volatility and any short-term losses. 

Having multiple ISAs working in cohesion with one another may be an optimal solution for a number of individuals. A young family for example, might want to set up a junior ISA for their children to help save for their future. Alongside this, they may want to subscribe to a lifetime ISA if they are looking to purchase their first property. Care should be taken when assessing the suitability of a lifetime ISA;. although the 25% government bonus is appealing, if you decided to not use the funds for your first house purchase, there is restrictive access until age 60, as well as limits on the value of the property that the ISA can be used for.

Do I have the wrong ISA?

It’s important to ask yourself this question and think to yourself, do I have the right ISA for me? You will need to assess your own personal short- and long-term goals; whether you want to save for the future or set aside some money to use in the short term, in a tax- efficient environment. Some rules can be restrictive and falling foul of the rules could cost you.

Having the wrong type of ISA for your objectives can make them ineffective. Although they appear to be simple wrappers, it is recommended to seek advice from professionals who have the expertise in this area, to help guide you through your overall financial plan.

If you’d like to learn more about how ISA can work within your financial plan, why not get in touch. We’re currently offering those with £100,000 or more savings, investment or pensions a free financial review worth £500.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

Investment returns are not guaranteed, and you may get back less than you originally invested. The Financial Conduct Authority (FCA) does not regulate Savings Champion and their associated services, cash or tax advice.

There have been two key announcements last week. The Bank of England held the latest Monetary Policy Committee (MPC) meeting and voted to keep the base rate at 5.25%, as was widely anticipated.

The day before, the Consumer Prices Index (CPI) measure of inflation was announced - 3.4% in the 12 months to February, down from 4% in January. This was lower than expected, and at its lowest level since September 2021 when it was 3.1%. Of course, as we have to keep reminding ourselves, this doesn’t mean that prices are falling, it simply means that the cost of things are rising a little more slowly. Certainly a lot slower than in October 2022, when CPI inflation hit 11.1% - the highest level in 41 years.

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That said, depending on your lifestyle, there may actually be some items that are in your inflation basket that have fallen in price. For example, although the rising cost of bread has slowed from 2.1% in January to 1% in February, which means the price is still rising a little, the price of butter and jam has been falling! And with the price of milk falling too, it looks like breakfast is a pretty inflation busting meal right now!

The main downward drivers of CPI have been an ongoing slowdown in the rising cost of food and restaurants & cafes – the latter helped by a slowdown in the prices of some alcoholic drinks such as gin and whiskey.

Motorists are also seeing cheaper prices at the pumps, as the average price of petrol rose by 2.3p per litre between January and February 2024 to stand at 142.2p per litre, but down from 148p per litre in February 2023.

Diesel prices rose by 3p in February to stand at 151.3p, but down from 169.5p in February last year.

The ONS stated: “These movements resulted in overall motor fuel prices falling by 6.5% in the year to February 2024, compared with a fall of 9.2% in the year to January”.

Core inflation, which excludes the more volatile energy, food, alcohol and tobacco, rose by 4.5% in the 12 months to February 2024. But this is down from 5.1% in January.

Of course, lower inflation means that once more there is greater expectation for the base rate to be cut and traders are now pricing in a 63% probability of a 0.25% rate cut in June. However, the Bank of England has indicated that it cannot start cutting rates yet, given stubbornly sticky growth in services' prices and wages, warning of the possibility of inflation remaining higher for longer.

What should savers do?

The good news is that whilst it feels like savings rates may have peaked recently, the top rates available have been pretty stable. So, this combination of stable savings rates with a drop in inflation means that there are many accounts available that are paying an interest rate that is higher than the current level of inflation, even if you now pay tax on your savings interest.

The top easy access account is paying a gross rate of 5.10% at the moment. After the deduction of 20% tax, the rate falls to 4.08%, but that rate still beats the CPI level of inflation which has fallen to 3.4%. Of course, that rate is variable, so could well start to drop once the base rate does, so if you can afford to tie some cash up, now could be a good time.

The top 1-year bond is paying 5.26% - which is 4.21% after 20% tax. And although longer term bonds are paying less, this is a clear indication that the market expects rates to start to fall soon, so locking in now for longer at a lower rate could see you earning more in the long run – and if inflation continues to fall, you could hedge against inflation for the duration. The top 5-year bond is paying 4.55%, which is 3.64% after 20% tax – still higher than CPI.

And, don’t forget that there is a £20,000 ISA allowance, which can shelter your savings from the taxman. The top easy access ISA account is paying 5.15% tax free/AER with app-only and new provider, plum, whilst the top paying 1-year cash ISA is paying 5.09% with Castle Trust. There is also the Virgin Money 1 Year Fixed Rate Cash ISA Exclusive Issue 11 which is paying 5.25% but you need to hold or open a current account with Virgin to be eligible – although you don’t need to switch current account or set up any direct debits. The top 5-year ISA is with UBL paying 4.16% tax-free.

Of course there are still a number of accounts that are paying less than inflation. Whilst closed to new business, the Virgin Money Access Saver account is still paying just 0.25%. And Barclays live Everyday Saver account is paying between 1.16% to 1.66% AER – the latter applying to the first £10,000 deposited only.

If you have £10,000 in an account earning 0.25%, with inflation at the current level of 3.4%, after one year, although the total balance including accrued interest would be £10,025, the real value after the effect of inflation would have reduced your spending power to £9,695. However, if you picked the top paying easy access ISA paying 5.15% tax free/AER, not only would the total balance have increased to £10,515 after a year, but more importantly the real value would have grown too – giving you spending power of £10,169, so more than keeping up with inflation.

This illustrates just how important it is to pick the top paying accounts. So keep a close eye on Savings Champion best buy tables. 

Take a look at our inflation calculator below, to see how your savings accounts are faring against inflation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate tax advice. 

The accounts and rates mentioned in this article are accurate and correct as the time of writing 22/03/2024.

Firstly, the Chancellor announced that a new British Savings Bond will be delivered through NS&I, (National Savings & Investments) which will be launched in April this year.

What this actually means is that NS&I will be re-issuing its 3-year Guaranteed Income and Guaranteed Growth Bonds offering savers a chance to deposit between £500 and £1million, whilst keeping the lot protected, as all deposits made with NS&I are guaranteed by the Treasury.

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The biggest news was from NS&I

The rate has not yet been released but NS&I has already announced that it will be ‘priced mid-market’ so it’s unlikely to be very exciting.

NS&I’s net financing target for the new tax year has also been announced and it’s been increased from the current level of £7.5 billion, to £9 billion.

This target is the amount that the Treasury-backed savings provider has been tasked with raising for the Government. Whilst an increase would normally be good news for savers, as it would ordinarily indicate that NS&I may need to raise savings rates in order to raise more money, the possible fly in the ointment this time is that the forecasted net amount raised for the current tax year is expected to be £10.9 billion – far above the target of £7.5 billion. So, NS&I is already awash with cash, which could mean more cuts rather than any increases any time soon. We’ll have to wait and see.

Allowances frozen

The Personal Savings Allowance (PSA) has remained the same since it was introduced in April 2016 – giving basic rate taxpayers £1,000 of tax-free interest per year and higher rate taxpayers £500. While this appeared pretty generous when it was launched, as savings rates have increased the PSA is being used up with less and less cash on deposit. In April 2016 the top paying easy access account was paying 1.45%, so you would have needed a deposit of £68,966 to breach the £1,000 PSA (assuming you held no other savings accounts). Today, if you were to open the top easy access account paying 5.11%, a deposit of just £19,570 would earn more than £1,000 in gross interest.

This is why cash ISAs have become so important once again – savers can earn tax free interest, regardless of the amount.

Which is why it’s so disappointing that the cash ISA allowance has also remained frozen. The Chancellor announced a new British ISA allowance – so an extra £5,000 can be sheltered from tax, but this is only for those happy to put money into British investments – it’s not an extra allowance for cash savers.

The Junior ISA allowance will also remain at £9,000 and there will be no increase to the Lifetime ISA limit, which is £4,000. Added to that, it’s disappointing that the 25% penalty charge for a withdrawal before the age of 60 for anything other than buying your first home has not been reduced, as was widely expected. And there has been no change to the upper value of the property that can be purchased – it will remain at £450,000.

The 'starting rate' for savings has been frozen again too at £5,000. This allows those earning less than £17,570 from employment or pension, to earn up to £5,000 in savings interest before paying any tax on it. This is in addition to the Personal Savings Allowance.

According to the Budget documents, the freeze in just the starting rate for savings should earn the Treasury £95m by 2029!

While it’s disappointing that Jeremy Hunt has failed to help savers to keep more of the interest they are earning on their savings, this doesn’t mean that you can’t put more pounds in your pockets. There is still good competition in the savings market, so keep an eye on our best buy tables to make sure you are earning as much interest as possible.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate tax advice. 

Crumpets or Croissants – what’s in your inflation basket?

The Chancellor, Jeremy Hunt, stated in his recent Budget speech that inflation is expected to fall below the 2% target in just a few months' time, according to figures from the Office for Budget Responsibility (OBR). Whilst politicians are patting themselves on the back for their perceived part in bringing costs down, I’m sure many people are still well aware we continue to live in a cost of living crisis and while inflation is coming down, this simply means that prices are rising at a slower rate, but they are still rising. The speed at which prices have risen on everyday items is hard to comprehend, but it’s not just the UK that is feeling the pain.

But what is really affecting inflation and how is it measured? How does the UK measure up against other economies,  how does our basket of goods compare, and most importantly what does this all mean for you and your financial future.

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What is inflation? 

The release of January’s CPI inflation figures by the Office for National Statistics (ONS) showed that inflation in the UK held steady at 4%, the same rate as in December but below the Bank of England (BoE) and analysts' predictions.

Figure 1 - UK CPI Inflation from January 2021 – January 2024, Source: Office for National Statistics

This marked the 30th consecutive month of inflation being above the 2% target set by the Bank of England, dating back to August 2021. The good news here is that inflation has been steadily falling from the 11.1% high in October 2022, despite the 0.1% rise in December from 3.9% to 4%. 

With rising inflation set to continue to impact our lives, it’s worth reminding ourselves about what inflation means and how it is measured. After the last few years, we are all aware of the fact that inflation is the periodic rise in the price of goods and services. But how is this measured to allow the Office for National Statistics (ONS) to come up with a figure each month?

Measuring inflation in the UK

Inflation is measured using price indexes: these do vary in the way they measure prices and what they include but the basics always stay the same. These indexes take a defined basket of goods and services and tracks the changes in the price of each item. Each item's price change is then weighted in relation to the share of total household consumption, to create an average figure that is representative of consumer spending within the economy.

The UK uses three main price indexes, the Retail Price Index (RPI), the Consumer Price Index (CPI) and the Consumer Price Index plus owner-occupiers’ housing costs (CPIH). The main focus is on  CPI, a monthly figure calculated by the ONS. This figure does not just hold importance as a way of showing how prices in the UK are changing but is also a measure used by the Government, which links its spending on areas such as state benefits to the figure.

The basket of goods

The basket of goods and services used to measure CPI is made up of over 700 products and is reviewed annually to ensure the measure remains representative of consumer spending. The recent review on March 11 2024, the ONS added 16 items including air fryers, vinyl music, gluten free bread, and edible sunflower seeds. While hand hygiene gel, hot rotisserie cooked chicken, and bakeware were among the 15 items that were removed. With the next review not due until March next year, it will be interesting to see how consumer spending over the next twelve months will affect what items are added and what items are taken away.

Now we have the basket of goods and services, it is the job of local price collectors to visit around 20,000 shops across the country, collecting pricing information. This is done to ensure regional price variations are included in the measure. They visit the same shops and collect information on identical products each month, while the information for larger chain stores is collected using central pricing policies.

The last step in the creation of the CPI figure is to compare the changes in price for each item in the basket, to those collected twelve months ago, to see how the price has changed over the previous year. Each price change is then weighted, taking into account the amount of household spending on the product before being added together to create the final inflation figure for the month.

How is inflation measured around the world? 

Inflation is measured in slightly different ways around the world. Price indexes (such as the CPI) are used by different nations. However, the composition, weighting and size of the basket of goods and services varies from country to country to ensure it is representative of the economy which it is measuring inflation for.  This provides an insight into how different countries and cultures spend their earnings.

In the UK for example, the basket of goods and services includes Yorkshire puddings, crumpets and fake tan. Items which I am sure may be less popular in France who include fresh scallops, vintage Champagne and butter croissants in their basket of goods and services. The basket used in Italy has over 1,700 items and differentiates between what it defines as “table” and “quality” wine in its calculation.

The United States record the change in price of around 80,000 products each month in their basket of goods, giving them space to include items such as cookies and fresh cupcakes in their inflation measure as well as canned ham. 

Finally in New Zealand, the basket also consists of around 700 items taking into account their outdoor lifestyle by including surfboards, fishing rods and women’s jandals, a local term for what we would call flip flops.

How does the UK inflation compare to the rest of the world

Around the world, inflation is continuing to sit above the targets set by many nations' central banks. Figure 2, below, shows the January inflation figures for G20 countries which were released at the time of writing, taking out the anomaly of Turkey and Argentina who reported inflation of 64.9% and 254.2% in January. It may be of some comfort to know that most major economies across the world are sitting in the same camp as the UK. That is with the  exception of China who are currently facing deflation, a decline in the prices levels of goods and services, due to a slowdown in their economy.

Figure 2 - Euro Area Inflation Rate - January inflation rate 2024, Source: Trading Economics

However, below shows the inflation forecast by the OECD for G7 nations in 2024 and 2025. They are predicting that the UK is set to have the highest inflation out of the G7 nations in both 2024 and 2025. This contradicts the OBR’s expectations, and highlights that the UK could face higher prices for slightly longer than other global economies.

Figure 3 - OECD forecast for inflation level in 2024 and 2025 of the G7 nations, Source: OECD

What this means for your finances and future seems clear at this point, prices will continue to increase, albeit at a slower pace. If we’re to believe the OBR then we may be in for less pain in the coming months. If we’re to believe the OECD then it may take some time to get there, and we may lag behind other G7 nations. If you’d like to discuss how inflation may affect your financial future why not get in touch and speak to one of our experts. We’re offering everyone with £100,000 or more in savings, investments or pensions a free financial review worth £500, so why not get in touch today.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.