Make sure you get your free money for saving

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Your saving and investing efforts can be given a serious boost if you can benefit from free money in the form of bonuses and tax reliefs. Here are four key saving incentives available to UK tax residents.

Pension

Employees under age 75 and who are not members of a defined benefits pension can attract a bonus payment from their employer and the government that has the effect of increasing their own contribution by at least 108%. Higher bonuses are available to higher and additional rate taxpayers, and from certain employers that pay more than the legal minimum.

From April the bonus for basic rate taxpayers falls to 100%, but because it’s based on a higher minimum employee contribution, the cash amount invested will be higher, as shown in the visual below.

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There is an annual limit on total pension contributions which is £40,000, £10,000 or £4,000 per tax year, depending on your earnings, tax position and whether you have accessed pension benefits.

Non-taxpayers (including children) or those with no earnings and who are below age 75 can attract a bonus of 25% on a pension contribution of up to £2,880 each tax year.

Before you make any pension contributions, check that you won’t exceed the pension lifetime limit which is £1,055,000 from 6th April 2019. Benefits in excess of this amount will attract a tax charge when taken as a lump sum or income.

Lifetime Individual Savings Account (LISA)

Anyone aged between 18-39 can open a LISA and (until age 50) save up to £4,000 per tax year and attract a government bonus of 25%. So, £1,000 saved immediately becomes £1,250. Any personal contribution to a LISA counts towards your overall Individual Savings Account allowance of £20,000 per tax year.

You can withdrawal money from your ISA:

-       When buying your first home

-       From age 60

-       If you have less than 12 months to live.

You’ll pay a penalty of 25% of the fund value if you withdraw the money for any other reason, so make sure you don’t save money you might need for other reasons. You can save your money in cash or stocks and shares. You can find out more about LISA here.

Help to Buy ISA (HISA)

Any UK resident with a national insurance number, aged 16+, who has never owned a residential property and hasn’t saved into a Cash ISA in the same tax year can open a HISA (until 30 November 2019, when no new accounts can be opened). The maximum investment is £200 per month, although in the first month you can invest up to £1,200 (which could also be from transferring that amount from a Cash ISA). The maximum you can contribute overall is £12,000.

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Source: HM Government

You can access your cash at anytime for any reason and, unlike the LISA, there is no penalty. However, if you use the HISA cash to fund the purchase of your first home, your solicitor can claim a government bonus of 25% of the amount you contributed. So, if you save the maximum £12,000, your bonus will be £3,000. Your HISA will also be increased by interest earned while you save (but interest doesn’t count towards the bonus).    

Help to Save (HTS)

If you are living in the UK and in receipt of Universal Credit and earning at least £542 per month (on top of your UC income) or you are receiving Working Tax Credit or entitled to Working Tax Credit and receiving Child Tax Credit, you can open a Help to Save Account.

You only need to qualify at the time you open the account and if you are a couple you can both apply for your own HTS account.

You can save up to £50 per month for up to 4 years, although you can vary or miss monthly contributions. The money attracts tax free interest and the capital is not at risk.

At the end of year two the government will add a 50% bonus to whatever you’ve saved, even if you have withdrawn that money. So, if you saved the maximum of £1,200 that would be a bonus of £600.  The same terms apply for years three and four, so the maximum possible bonus on £2,400 of saving would amount to £1,200.

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Ordinarily it makes sense to repay expensive debt or build up an emergency fund before saving and/or investing. However, the bonuses and incentives set out above suggest that this might not be the case, particularly as most of the savings allowances are offered on a use it or lose it basis. If in any doubt, consult your local citizens’ advice branch for personalised guidance.  

Jason Butler