When I moved to the UK in 2007, I had to go through the whole process of opening a bank account and learning about how to optimize my savings. With so many banks and financial products, it took some time. At the beginning, I just went with my boss’s bank since he vouched for me as an employee and they would open the account before I got my first utility bill to prove I was indeed a resident. Then I looked for better deals and moved on to other institutions.
Opening a savings account in the UK
When you open a savings account, you are presented with two choices, a normal savings account, where interests will be taxed at the same rate you pay taxes, or a tax free Individual Savings Account (ISA). ISAs are open to every UK resident, but only make sense if you pay taxes in the country.
Every tax year, you can deposit a certain amount of money into an ISA, and all the proceeds will be tax free. The current limit is £11,280 that you can deposit until the end of the tax year in April. You can split your money between a cash ISA or a stock and shares ISA if you prefer to invest in the stock market. You can put all your allowance in stock and shares, or up to £5,640 in cash and the rest in stocks.
Why chose cash ISAs
You can use a fixed rate cash ISA, or a variable rate one, which generally offers a bonus rate for the first year, then reverts to a very low rate.
That mean if you want to take full advantage of your ISA money, you would have to transfer it on the next tax year. DO NOT withdraw money from the old ISA, or your allowance would be lost. You need to ask your new provider to take care of it.
Most UK banks offer cash ISAs.
Cash ISAs are great if you need the money to stay easily accessible. If you are saving for a house deposit, or a mid term project like buying a car or building an extension, the money will earn tax free interest in the meanwhile.
Why chose stock and shares ISAs
Like cash ISAs, stock and shares ISAs are tax free accounts. And it is likely your return on the stock market will be greater than the interest rate on a cash ISA. Better have that tax free, BUT you need to be in for the long term. If you can’t stomach the market’s ups and downs, stick to the cash ISA. If your savings are there for the long term, a stock and shares ISA can be worth it.
Check HM Revenue & Customs’ FAQ if you want to understand more about cash ISAs and the tax implications, as well as the process to transfer an ISA from a bank to another one.
Only one month left to top up your cash ISA, do it now or this year’s allowance will be lost!