Maximise your savings interest and minimise your tax liability
Written 27th March 2025
My son is 21 and has managed to start saving a bit towards a deposit for his first home. I'm wonderful so I've no idea why he's so keen to move out 🤣🤣🤣
Just kidding! Of course I understand why he wants to be independent and have his own space. My job has always been to raise an independent human being so I'm pleased he wants to go his own way.
And I've been nagging him for ages to open a savings account to earn some interest on his savings. It's taken over 2 years to get him to open one and it's now got all his spare cash in it. An important point, there is no point having a savings account but not using it and keeping spare cash in a non interest paying account, even for a day. Move it to an interest paying account until you need it, then just transfer what you need to the other account to cover your expenses / bills as you need to.
So then I started nagging him about opening an ISA account so the interest earned is not liable for tax. I'm guessing he needs to save at least £50k with his starting salary to get even a small flat in our area. £50k in a savings account at todays average interest rate (I'm going to use 4% for this example) would earn him £2000 in interest per year. Each individual in the UK has an allowance of £1000 per tax year they can earn in interest before paying tax on it. So £1000 of that £2000 of interest would be liable for income tax. Basic rate taxpayers would pay 20% income tax on the interest earned (over the £1000 allowance), which would mean he'll pay £200 in tax in this example. However put the money into a cash ISA account and there is no tax payable on the interest. Sounds like a no brainer.
After months of explaining this to him, the tax year end is looming and hoorah, he's opened a 2 year fixed rate cash ISA account at 4.1%. Could have done a 1 year fix for 4.25% but from my research online base rates are predicted to drop (confirmed by the Chancellor yesterday) so he's wise to lock in for a longer period in my humble risk adverse opinion.
He gives me £300pm for his room and board which I think is a pretty good deal and has made his own decision to save at least 50% of his wages each month. I honestly never nagged him about saving. I just suggested it would be a good idea to have some spare cash set aside in case he ever needed it.
He also pays 8% of his salary into his pension. As he's done this since he first started work, he has never had the bigger wage packet that he would have had if he was only paying 5% or whatever the minimum amount for pension contributions is, therefore, he's never 'taken home' more money so doesn't notice the pension contribution coming out of his wages (if that makes sense). His employer also contributes 14% to his pension. I'm hoping if he carries on like this he'll be in a position to retire at 50. Or at least have the choice.
The point of all this waffle?
Start young. Saving. Budgeting. Thinking about your long term financial goals and what you can do to make them happen. It is not out of anyone's reach if you make some informed decisions and sensible choices rather than being brainwashed by the media into spending. That approach is much more likely to give you your dream future or a cosy retirement than buying a lottery ticket, playing bingo or hoping to be a YouTube millionaire.
