ISAs are best vehicle for tax-free investment as savings ratio shrinks

18 October 2007
In today’s financial climate, ISAs offer the most competitive way of making tax-free savings on your investment, according to research carried out by The Daily Mail.

The savings ratio – the rate at which people save – has dropped considerably in recent years. In 2006 it was at 5 per cent (£50 saved per £1,000 earned), half of what it was 10 years before; in 2007 it dropped a further 50 per cent to 2.5 per cent, which shows that the UK is only saving £25 out of every £1,000 it earns.

Nothing was said in the Pre-budget report to encourage people to save more, so it is important for them to put what little they do invest in the best possible place. ISAs provide a tax-free method of saving which can be for long or short term investments.

The Daily Mail compared the interest earned with an ISA and with taxable bonds in order to illustrate the savings that can be made by investing wisely in a tax-free account. The interest earned on each £1,000 in the most competitive one-year taxable bond would be £54, but it would generate £67.50 of interest in a tax-free ISA. High rate taxpayers would make just £40.50 in a taxable bond.

For those willing to tie up their money for the long term, National Savings Certificates also offer a tax-free saving method which come in two forms – the two-year Fixed Interest Savings Certificates which pay 3.95 pc a year if you hold it for two years, and the Index-linked Savings Certificates, which ensure that your savings rate keeps up with inflation.

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