Created by: Charlotte Nash | 9 November 2018

Saving: The Basics

Everyone can benefit from having some spare cash stored away for an emergency. Putting a little bit of money into a seperate account whenever you can is the simplest form of savings.

There are lots of different options out there for savers, many of which give you the chance to earn extra money based on the cash you already have. There are also loads of confusing terms and ideas linked to saving, so our guide should help you to understand the basics and start building up your dosh.

What’s an ISA?

When you put money into a bank account to save it, you generate extra cash based on the interest rate and how much you have put in. An ISA is an account that doesn’t charge tax on any interest your savings earn, meaning you get to keep all of the money you generate. You can put up to £20,000 into a simple ISA each tax year (April - April).

There are a few different kinds of ISA. The first is a Help to Buy ISA. If you’re over 16 and saving towards a deposit for your first home, the Help to Buy ISA is a great option as the government give you an extra 25% on top of anything you save. So, for example, if you save £1,000 in a year, the government will give you an extra £250.

You can deposit up to £200 of savings into your Help to Buy ISA each month, and the max. government bonus you can receive is £3,000 in total. You can only withdraw the money to put towards buying your first home.

A Lifetime ISA (LISA) works in a similar way to Help to Buy, but the rules are slightly different. You have to be aged between 18 and 39 to open a LISA, and you can add up to £4,000 a year to it, either in one go or as and when you would like to. As with Help to Buy, the government then give you an extra 25%, but with a LISA you receive this bonus yearly, meaning you could earn up to around £33,000 from the government if you have the account for the maximum number of years and deposit £4,000 into it each year.

You can use the savings and bonus in your LISA to either buy your first home or save for retirement. If you take it out for anything else, you’ll have to pay a penalty charge.

There are also simple ISAs which allow you to just put your money away and earn tax-free interest. Some will allow you to withdraw your money without paying a penalty charge and others will charge your or deduct interest for early withdrawals.

One thing to remember, though, is that if you earn under £46,350 each year (and so count as a basic rate taxpayer) you won’t be taxed on the first £1,000 of interest you earn on your savings each year. This doesn’t include interest earned in ISAs either, so if even if you earn £5,000 worth of interest in your ISA, you still have the £1,000, non-ISA allowance.

Are ISAs the only way to save money?

Definitely not! You can also save money using your regular bank account, or in specialised savings accounts. If you fall into the basic rate taxpayer bracket, this is definitely something to explore as you won’t have to pay tax on your first £1,000 of savings.

Interestingly, a lot of normal bank accounts (day to day current accounts) are beginning to offer high interest rates for cash balances, so shop around and try to find a bank account that suits your daily needs as well as offers a good rate on savings.

Regular savings accounts often ask that you add a little bit of money each month to get the best interest rates. If you’re able to commit to saving a consistent amount, these can be a good option, but usually have an upper limit so won’t work for anyone wanting to earn interest on a large amount of money.

If you know you won’t need access to the cash, you could go one step further and lock your money away in a fixed-rate savings account. These kind of accounts guarantee the interest rate quoted when you first open them for a certain amount of years, but you won’t be able to access your money during that time period.

It’s worth knowing that, often, expert savers advise filling up either a LISA or Help to Buy ISA before trickling any additional money down to a regular ISA or savings account. This way, you get the best interest possible and the biggest bonuses for the bulk of your money.

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