Savings (for the short term)
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Savings are generally for the short term and are usually placed in an account where it earns interest without the risk of losing any of it (short of a bank, credit union or building society collapse).
You can usually get your money out immediately or after a notice period which could be 30, 60 or 90 days.
Your money grows because interest is added monthly or yearly. However, this can be a slow process and it can take many years for your original deposit to grow much. You also need to save regularly and not dip into the fund, if you can help it. Be aware of how inflation can affect your savings.
Inflation
Inflation happens when prices go up throughout an economy. The effect of inflation means that the money you save will buy less each year. To protect your savings against this, you should look for an after-tax interest rate that is more than the rate of inflation.
Tax
Interest paid on your savings is treated as ‘income’ and as such you may have to pay tax on it, just as you pay tax on your wages. You will usually receive your interest net of tax, with 20% tax already paid.
- If you don’t pay income tax, you can fill in form R85, and receive your interest gross (before tax is taken off).
- If you are a basic-rate income tax payer, you don’t get any tax back but you won’t pay any more.
- If you are a higher-rate income tax payer you will need to declare this income on your tax return, and pay a further 20% on the interest you have earned.
Cash ISAs (Individual Savings Accounts) let you receive your interest free of income tax. Some NS&I savings products, such as premium bonds, and saving certificates, are also free of tax.
Cash ISAs (Individual Savings Accounts)
There are two types of ISA – cash or investment. You can invest in two separate ISAs in any one tax year: one cash ISA and one investment ISA.
For investment ISAs see Investing (for the longer term).
You can currently invest up to £3,600 (2009/10 tax year) in a cash ISA, and can only invest with one provider in any one tax year.
The ISA subscription limit will be significantly increased from the current £7,200 to £10,200 on 6 October 2009. Within this new limit, up to £5,100 can be saved in cash. However, the new limit will be implemented in two stages, and the 6 October increase will only apply to investors aged 50 and over. All other ISA investors will have their ISA limit raised to these levels from 6 April 2010 onwards.
Cash ISAs usually pay a higher interest rate than normal savings accounts and let you receive your interest free of income tax.
Where you can save
You can save in a wide range of savings accounts available from banks, building societies, credit unions and National Savings and Investments (NS&I).
In addition to regular savings accounts, you can also save in special Christmas savings accounts offered by some building societies and credit unions.
What to look out for
There are many savings accounts with many different features. These features include:
- Interest Rates
- Some accounts have a higher interest rate for an introductory period, and then it drops. Others have a rate that goes up the more money you have in the account.
- Notice Periods
- For withdrawing your money without penalties, such as 30, 60 or 90 days
- Minimum Deposits
- Some accounts require a certain amount to be paid in regularly.
- The Way Interest is Added
- Some accounts add it monthly and others once a year.
- Additional Bonuses
- These are usually payable only in certain circumstances, and you should make sure you understand what these are.
- Tax-Free Savings
- By using a cash ISA (Individual Savings Account).