How to earn £1m in interest without paying any tax
How to earn £1m in interest without paying any tax
It’s a new year and if you’re looking to reinvigorate your finances, we’ve found a way you could make £1m in interest, without paying a penny of tax. Here we explain how it works and how you can apply this method to your own savings.
How much do you need to save?
If you don’t already have a savings habit, there’s no time like the present to start. Any amount of money you have set aside will be useful and you may have specific savings goals you’re working towards.
These could include a house deposit, a new car, a child’s university fees, a dream holiday or your retirement fund. Putting away a regular sum of money, and adding any windfalls to it, is a sensible way to watch the money grow.
However, the amount you put away, and where it’s kept, is vital if you want to really watch it grow.
The goal of making £1m in interest is a big one and while it’s not guaranteed we’ve been analysing the numbers to find out how it could be done.
Obviously, the more money you can save, and the more interest you can earn, the closer you will be to the million-pound pot. While your goal may be smaller than £1m, the method we’ve used still applies – and you can use it to calculate how soon you might reach your target too.
Where should you keep the money?
Where your money is kept is almost as important as how much money you put away. This is because in order for you to not pay any tax on the interest your money earns, it needs to be in a tax wrapper.
You have a few options here including:
A cash ISA
A stocks and shares ISA
An innovative finance ISA (or IF-ISA)
With each of these you’re given an annual limit on the amount of interest you can earn without paying tax, and it’s currently set at £20,000 for the 2021-2022 tax year.
The higher the interest rate, the more your money will grow. When looking at these accounts, you’re usually going to get a higher rate with a stocks and shares or an IF-ISA.
That’s because the money is being invested giving you both potential higher returns but also a level of risk that you may lose the money.
When you choose an investment vehicle, you take on this risk and therefore it’s important you both understand exactly how it works and that you realise there is a chance you could lose the money you’re putting in.
On the other hand you have the option of a cash ISA, which while it’s likely to pay a lot less in interest, your money is protected. A cash ISA also gives you the option of having easy-access to your money, if you needed it in an emergency for example. There’s no rule to say you have to pick one type of ISA so you could always go for a mixture of accounts.
How does the interest grow?
Now we get to the exciting part, the road to your tax-free £1m.
If you were to put away a new sum of £20,000 every tax year for 25 years and let’s say you earned 8% interest - which is possible with easymoney’s IF-ISA - at the end of this term you could be left with £1,196,057.81 in interest. Please do remember that past performance does not guarantee future results. Your capital is at risk.
You would have put away £500,000 of your own money during this time, and that money will have earned tax-free interest - of 8% every year. But on top of that you will also earn interest on the interest you earn every year, also known as compound interest.
This example also relies on all factors about the account remaining the same, there not being any external interventions or new regulation changes, and you continuing to get that same interest rate for the 25 years. While that obviously can’t be guaranteed - and any money within an IF-ISA carries with it the risk of being lost entirely - it’s an interesting way to look at how your money could grow.
The reason behind the £1m growth comes down to compound interest. In its simplest form, it’s a method of earning interest both on the amount of money you’re putting away, and the interest you earn on it.
For example, if you invested £2,000 and the interest paid was 10%, you would earn £200 in the first year. That would mean for the second year you would have a balance of £2,200. If we pretend for a second that nothing changes the next year, you’d earn 10% on £2,200 - earning you £220 - because you’re earning interest both on your deposit and the interest you’ve earned.
You don’t need to put away £20,000 either - the method works with smaller amounts, over longer periods of time. If you want to see just how much money you could make, there are lots of free compound interest calculators online which can quickly show you the potential returns your money could be making.
How long until I’m a millionaire?
Put down that holiday brochure, it might not be time to plan an early retirement just yet as although it could be possible to make £1m in tax-free interest, it’s in no way a quick win.
This is a long-term way to build your savings up, by slowly and gradually adding to your pot and watching the returns add up.
It’s also worth remembering that outside forces such as the economy and the global political situation can have a big impact on the growth of your savings.
The last two years have shown us anything can happen so not only may any investments you have dip, but your own circumstances could also change. If you lost your job, or become seriously unwell, for example, you may be forced to use any money you have saved up instead of keeping it for a rainy day. This is why it’s always a good idea to diversify and keep your money in a few different places - and not to put it all in one basket.
All the facts and figures presented are accurate at the time of posting.
easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.
easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.