Interest free savings for self employed person - questions

Kizzy2000

Hello Everyone,

This may sound like a really silly question but I'm recently self employed and a friend mentioned that I could save tax free with things like ISAs.

My question is that is it tax free in the sense that say I earned 50k in a year and I put 3000 into an ISA would I only pay tax on 47k that year ?

katyw

Not quite.

You would pay tax on your 50k earnings via your self-assesment tax return. You can take off your expenses, but that's another question.

The 3k you put into the ISA would earn you 'tax-free' interest. (ie it would save you the 20% tax you would have paid if this had earned interest in a normal savings account). I would always recommend putting spare cash into an ISA (up to the allowable limit) rather than a normal savings account.....anything that Mr Brown and Mr Darling don't get their hands on is a bonus to me :j

turbobob

You get tax relief on pension contributions at your highest rate of tax. So if you were a higher rate tax payer you would get 40% tax relief on contributions. http://www.pensionsadvisoryservice.org.uk/personal_and_stakeholder_pensions/contributions/

So they are tax free in the sense you described. Unlike ISA's you can't touch them until you reach a certain age though.

Kizzy2000

Thank you both for your help, I quite agree with your sentiments katy and will be sticking my spare cash into an ISA.

As for the pension that was another question I had and thanks for answering it.:D

dwsjarcmcd

Another way to save money without paying tax on it is via an Offset mortgage, if you have a mortgage. I have deliberately used the term 'not paying tax' as opposed to 'tax free' as the interest you would have earned is used to reduce your mortgage interest.

You can still gain access to your savings when you need to pay your tax bill but they can be used to reduce your mortgage without any tax deductions. I think they are appropriate for self employed people to consider.