National Savings have several schemes that are tax free, but some accounts do not pay very attractive rates of interest. Nevertheless, the freedom from tax can compensate for this, particularly for higher rate taxpayers. For example, if the savings certificate pays three percent interest, then this can be equivalent to five percent in a taxable savings account for a higher rate taxpayer. Furthermore, the capital is guaranteed by the government.
Among the tax free investments are fixed interest certificates that pay a guaranteed income over two or five years and three or five-year index linked certificates, whose interest moves in line with the rate of inflation.
Adults can invest in bonus bonds on behalf of children. They need to be held for five years to qualify for the bonus and you can only invest up to £3,000 per issue for each child. Most children, however, would not pay tax anyway.
Premium bonds are not technically tax-free saving scheme. But all winnings are free of income and capital gains tax. The minimum investment is £100, premium bonds are included in monthly draws and can be cashed in at any time. Average returns are about equivalent to a top building society account for a higher rate taxpayer, but some will do much better or worse than average.
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