Unfortunately, interest paid on your savings and investments is treated as income, which means you will be obliged to pay tax on it if you are a taxpayer.

This is usually deducted at source.

However, “tax free wrappers” exist – such as pensions, Individual Savings Accounts (Isas) and Child Trust Funds - into which you can place certain investments and thus benefit from paying little or no tax. In addition, pensions offer the added bonus of tax relief on your contributions although most of your retirement income when you retire is taxed.

Isas

These should be the first port of call for anyone with cash to save because they are the simplest way of making money without sharing the proceeds with the taxman. Isas can be split into two distinct camps: cash Isas and stocks and shares Isas.

Cash Isas, which are the most popular style, are tax-free savings accounts offered by most banks and building societies. Interest is paid on a regular basis, which means that your investment is guaranteed not to lose any money. Stocks and shares Isas, invest in assets such as open-ended investment companies, investment trusts, gilts and shares. However, because they will be exposed to stock markets, the value of your investment can fall as well as rise.

You can usually get access to your money whenever it’s needed, although there are some restrictions. Currently, individuals can invest up to £3,600 in a cash Isa and up to £7,200 in a stocks and shares Isa during a tax year, within an overall annual savings limit of £7,200. In addition, they are allowed to transfer assets from cash Isas into stocks and shares Isas. From October 2009 the annual limit for tax-free Isas will be £10,200 for over-50s of which £5,100 can be invested in a cash Isa. From April 2010 these limits will also be available to all people over 16.

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