Getting a good return from your savings accounts means keeping a careful watch on the rates that your bank or building society pays.
But how much tax you pay on your savings interest is a critical factor in determining your overall return, especially when savings accounts interest rates are low.
Unless you are a non-taxpayer failing to take advantage of your ISA tax allowances or consider savings accounts that are tax-free means that your savings interest will be paid net of 20% tax.
This deduction, automatically carried out at source by your bank or building society, obviously reduces your returns considerably. But there are a number of ways to cut back on the amount of tax you pay.
The first tax-reduction strategy is to make use of yourcash ISA allowance. In 2008/9 the cash ISA allows you to shelter £3,600 in savings tax-free. If you deposited £3,600 into a cash ISA paying 3.5% you would earn £25 extra in interest a year over a normal savings account paying the same rate.
For most normal and higher taxpayers the only other tax-free savings accounts options are offered by the government-run National Savings and Investment. Unfortunately NS&I offers really poor rates on most of its products, which include ISAs, fixed and index-linked savings certificates and Premium Bonds.
We don’t recommend you use NS&I for any savings accounts or other products unless you need total safety as their rates are normally well below the market best. See our savings accounts comparison tables for the best rates available elsewhere.
