Britons generally don’t save. Research carried out by the FCA in April 2017 found that just under 50% of working-age Britons had less than £100 in savings. In an attempt to encourage them to put money by every month, there are a number of UK government-backed savings schemes. All of them offer a range of benefits for the account-holder from tax exemption to extra bonuses.
In this account we’ll give a brief overview of the different savings schemes available with key information about eligibility, savings limits, how the scheme works and its benefits. We’ve included information about:
- How you open a government-backed savings account
- Saving schemes for children: Junior ISA
- Individual Savings Account (ISA or NISA)
- Life-time ISA (or LISA)
- The Help-to-buy scheme
- The Help-to-save scheme
How do you open a government-backed savings account?
All the schemes are available from a range of banks, building societies, credit unions and so on. How to apply depends on the provider – by phone, online and/or by visiting your local branch.
Saving schemes for children: Junior Individual Savings Account
For a Junior ISA (Cash or Investment), the parent or guardian opens the account on the behalf of a child who is under 18 and a UK resident.
How a Junior ISA works
A Junior ISA allows parents, relatives and friends to deposit money in an account for when the child is older. No income tax or Capital Gains Tax is payable up to the sum of £4,260 for the 2018-19 tax year.
Once the cash is deposited in the account, the money is locked away. This means it is inaccessible, apart from exceptional circumstances, until the child turns 18. Although the child can manage the account at 16, they can’t withdraw any cash until they become an adult. If they choose to keep the account open, it’s automatically rolled into an Adult ISA.
Individual Savings Account (or NISA)
An ISA is open to:
- All UK residents
- 16 or over (for cash ISA)
- 18 or over (for stocks & shares or Innovative ISA)
How ISA works
An ISA (or NISA) is a tax-efficient way for British residents to put money by. The scheme allows them to save cash or invest in stocks and shares (or a combination of both) up to a limit of £20,000. Under this limit, account-holders don’t have to pay income tax or Capital Gains Tax on any interest earned. Some providers have more flexible accounts which allow savers to withdraw and replace money as long as they do so in the same tax year.
Life-Time ISA (or LISA)
To open a LISA, the account-holder must be aged 18-40.
How the LISA works
The LISA allows adults to save up to £4,000 a year, and then receive a 25% top-up bonus from the government. This bonus is paid every year till the account-holder turns 50. After this age, they still earn interest on their savings but don’t get a bonus. The bonus will be reduced for early withdrawals.
What is the LISA for?
The government intends the LISA for two main purposes: to help with the purchase of a house and/or to put money by for retirement.
There’s no such thing as a joint LISA so if a couple are buying property together as both are entitled to take advantage of the LISA scheme.
For house purchases, a LISA must be open for at least a year. It can be used towards any residential mortgage (apart from buy-to-let) on a UK property as long as the house costs under £450,000. Unlike the Help-to-Buy scheme, the money can be used towards any of the home purchase expenses including the deposit. There’s no such thing as a joint LISA so if a couple are buying property together, both are entitled to take advantage of the LISA scheme and its bonus.
Using a LISA to save for retirement is a much longer-term savings goal. The terms of the scheme mean that if someone starts savings the maximum amount from the age of 18, they can receive the maximum bonus of £33,000 as long as they make no withdrawals.
It is possible to hold both a NISA and LISA, but the overall limit for savings remains £20,000. Therefore, the account-holder would have to split their allowance between the two to avoid paying tax.
To take part in the Help-to-Buy scheme, the account-holder must:
- Be aged 16 or over
- Be a first-time buyer
- Save at least £1,600 over 3 months to receive the minimum bonus of £400
How the Help-to-Buy scheme works
Like the LISA, this scheme is intended to help first-time buyers get on the property ladder. It allows savers to put by up to £200 a month (or a lump sum of up to £1,200 in the first month), and receive a government bonus of 25% (or £50). Account-holders are allowed to save up to £12,000 for the maximum bonus of £3,000. As there’s no joint account for this scheme, a couple buying property together are both entitled to benefit from the scheme.
The money can only be used on UK residential properties which cost up to £450,000 (in London) or up to £250,000 (the rest of the country). In order to release the money (including the bonus), a solicitor applies on behalf of the account-holder. The cash can only be used for the purchase price of the property and not for any of the other expenses associated with buying property such as the deposit, legal fees, etc.
Questions on government-backed savings schemes
Government backed savings schemes are schemes for people who are on low incomes who are claiming certain benefits and are facing financial difficulties. Help to save schemes gives bonus payments from the government for savings paid into the account that is registered for the saving scheme.
Generally, if you have earned interest on your savings, this income would be considered taxable. However, this does not necessarily mean that you would have to pay tax on national savings, as this will depend on how interest you have earned in total on an annual basis and your tax bracket. You also have the option to use ISAs to protect your savings from being taxed.
If you have savings, and are getting child tax credits or working tax credits, only you taxable income is taken into consideration. Therefore, you may be able to claim tax credit regardless of the amount of your savings. The interest you earn from savings, however, is categorised as income.
To join the Help-to-Save scheme, the account-holder must be an adult on a low income defined as a recipient of Universal Credit or Working Tax Credit or receive minimum household earnings of 16 hours a week at the National Living Wage.
How the Help-to-Save Scheme works
Set up in 2017, the Help-to-Save scheme encourages people on low incomes to make savings, and is due to run until December 2030. Account-holders can put by up to £50 a month over a 2-year period, and receive a 50% government bonus. The maximum they can save therefore is £1,200 and the maximum bonus is £600. If they choose to continue for another 2 years, this bonus will be doubled. They are allowed to make withdrawals, but then the bonus is calculated according to the highest balance held in their account (and not the standing balance).
Conclusions about government-backed savings schemes
It’s never too soon to start saving – whether you wish to teach your child good money management skills, fund a house purchase or to plan for the future and save for retirement. For all these eventualities, the UK government offer a scheme to help. Tax-free allowances and significant bonuses for saving regularly can help you realise your dreams all the sooner, so why not accept their helping hand?