When it’s OK to avoid tax

By Paul Lewis on June 27, 2007 in Adults, Children, Young people

If you have debt don’t save. But if you don’t have debt (or you want to ignore me and save anyway) make sure you get the best return on your money. There are two problems. First, the banks want to pay as little as they can get away with. Second, the chancellor is hiding underneath your savings pot with his spanner draining away £1 in every £5 it earns. So to make your money work harder (after all you worked hard enough to get it):

● Don’t pay tax.
● Get the best rate.

Tax on savings is voluntary. You can pay it if you want to. But as long as you save less than £3,000 a year you do not have to pay tax. The choice is yours. Cash ISAs were one of Gordon Brown’s best ideas, because all the interest your money earns is paid tax free. That’s right. No-one will creep up in the night and nick a fifth of it. And it’s even better if you are fortunate enough to pay higher rate tax (I call earning £40,000 a year quite fortunate don’t you?), because that’s free of higher rate tax too.

ISAs are so simple and attractive that more than £100bn has been put in them. And they are good for everyday savings – putting aside a few quid for a holiday, a new outfit or for Christmas: or just saving a bit of cash for security.

You can take the money out whenever you like and it is still tax-free. Though when you put it back that will count towards the £3,000 annual limit (it rises to £3,600 next April).

Although Brown made cash ISAs simple, the banks have made them complex and imposed restrictions they hope will confuse you into picking a bad deal. Choose one that follows these simple rules:

● You can pay in and take out however much or little you like.
● You can pay in and take it out whenever you like.
● There is no bonus rate for the first few months.
● You do not have to open a linked bank account.

Find one like this that pays 6% (Egg for example pays 6.05%). In other words if you put £1,000 in there you will make £60, tax-free. And you’ve done no work. Magic!

Paul Lewis is a freelance writer who presents Money Box on Radio Four